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Netergy Networks: Being There When It Happens

Everyone knows IP telephony will be big. The question is: When?

Of course, the Net is really an extension of telecommunications, so using this as a platform for telephony makes sense. Then again, having people change their habits is a tough thing. But this is not stopping a variety of companies from trying to find market opportunities in IP telephony.

One is Netergy Networks . The company has two main product lines. First is the Advanced Telephony Systems (ATS). This is a complete server solution that allows service providers to host iPBX services for other companies. Next, there are the Audio/Video Semiconductors. This helps telephone manufacturers build cost-effective IP telephones, of course, allowing for high-quality audio and video output.

Netergy deals mostly with big customers. These include competitive local exchange carriers (CLECs), incumbent local exchange carriers (ILECs), Internet service providers (ISPs) and application service providers (ASPs). Other customers include original equipment manufactures in the telephony industry. These companies like Netergy's products because of the quality and scalability. Use of these products also improves speed-to-market.

The company has been generating decent revenues. In the last quarter, the company had revenues of $6.5 million. This compares to $5.5 million in the same period a year ago. Why the small increase? Basically, the company has discontinued its consumer videophone business and is focusing on IP telephony. So, if you exclude the videophone revenues, then the growth was $4.6 million to $6.4 million. The company is losing money; but the losses are not alarming. The pro forma net loss in the last quarter was $2.6 million.

As the company makes its transition, expect the growth rates to accelerate. For example, Netergy entered a strategic deal with STMicroelectronics NV, which invested $27.75 million. STMicroelectronics is one of the largest semiconductor suppliers. The deal will not only call for use of STMicroelectronics' distribution, but also joint development of IP technologies for DSL and cable modems.

According to Frost & Sullivan, the market for IP-based packet-switched networks is expected to grow rapidly. The market was a mere $6.3 million in 1997; by 2002, the market is forecasted to reach $8.8 billion. So, it was a smart move for Netergy to focus exclusively on this marketplace. The move should ultimately result in enhanced shareholder value.