Net2Phone Reports Record Third Quarter Results; Signs Multi-Year $20 Million Licensing Agreement With Liberty Media for Cable Telephony

Business Wire, June 14, 2001

Business Editors

NEWARK, N.J.--(BUSINESS WIRE)--June 14, 2001

Company records $40.6 million in quarterly revenues

and EPS of ($0.41), excluding restructuring and other

charges and cost of free minutes

Company achieves breakeven in phone-to-phone consumer business

Eliminates free minute subsidies to partners ahead of

schedule, yielding significant savings to the company;

MSN and Yahoo migrate to paid model

Net2Phone Inc. (NASDAQ: NTOP), the leading provider of voice and enhanced services on IP networks, today reported third quarter fiscal year 2001 results ended April 30, 2001. Revenues from continuing operations totaled $40.6 million for the quarter, representing a 115% increase over revenues of $18.9 million for the third quarter FY2000 and a 17% increase over the prior quarter revenues of $34.7 million.

Net2Phone Inc. and Liberty Media Corporation (NYSE: LMG.A and LMG.B) also today announced a five-year $20 million licensing agreement. Under the terms of the Binding Memorandum of Understanding, Liberty Media will license some of Net2Phone's core VoIP technology and make it available to its International cable affiliates serving over 25 million households.

The license marks two new milestones for Net2Phone: (i) The significant entry into the international cable sector with one of the most substantial players in the space, and (ii) The introduction of licensing as a new revenue stream for Net2Phone. Consistent with previous strategic guidance, licensing Net2Phone's technology enables telecommunications companies and cable operators to reap the benefits of Net2Phone's proven Voice over IP technology without investing heavily in R&D, infrastructure, and technology. Net2Phone expects to enter into other licensing agreements with additional telcos and broadband providers, enabling them with core Voice over IP technology and services.

This license facilitates Net2Phone as a platform to provide IP dial tone to Liberty and other cable operators.

"We are very excited about Liberty's decision to license our technology, as this validates our business," said Howie Balter, CEO of Net2Phone. "As we've

repeatedly communicated, our core business of routing voice and enhanced services over IP networks has and will continue to grow steadily as we have forecasted in the past, and we believe that licensing fees can provide high margin revenue that can support both top and bottom line growth."

Net loss from continuing operations (excluding restructuring and other charge) for the third quarter of FY2001 was ($23.9) million or ($0.41) per share. Net loss before restructuring and other charges for the quarter including free minutes was ($28.7) million or ($0.50) per share, as compared to a net loss of ($11.4) million or ($0.21) per share for the third quarter of fiscal 2000 and ($23.9) million or ($0.41) per share in the second quarter of fiscal 2001. Net loss for the quarter including restructuring and other charges and free minutes was ($119.3) million or ($2.06) per share, as compared to ($176.2) million or ($2.99) in the prior quarter.

This quarter, Net2Phone reported restructuring and other charges, write-downs of certain receivables, inventories and marketing distribution commitments from certain distribution channels and non-cash compensation charges from the issuance of stock options of approximately $88 million. Approximately half of the charge is attributed to the consolidation of business lines and the closing of certain corporate subsidiaries abroad. The remaining balance of the write-down resulted from the re-evaluation of certain marketing relationships to reflect current market values. The company will continue to support its product lines without incurring costs of operating these subsidiaries in its current fashion. As a result, the company is reducing the value of goodwill and intangibles from certain acquisitions and investments. The company expects to incur an additional $3-4 million for possible severance costs attributable to consolidating these operations in Q4 FY 2001.

"We have set out a clear path to profitability, which requires us to critically assess each line of business. As such, we have already hit break-even in our phone-to-phone consumer business, and are working closely to evaluate each product and service to ensure profitability," said Howie Balter, CEO of Net2Phone. "We are on track to reach our objective of positive EBITDA for July of next year."

Depreciation and amortization for the third quarter was $5.1 million as compared to $3.8 million in the prior quarter, and $1.6 million for the same quarter year-ago.

Cash, cash equivalents, marketable securities and related investments as of April 30, 2001 were approximately $268 million. In the last quarter, approximately $25.3 million was used for capital expenditures, and an additional $24 million was due to a decrease in value of certain marketable securities. The company expects a 40-50% reduction in capital expenditures in Q4 2001.

Gross margins in the quarter were 27%, excluding free minutes. Including free minutes but excluding one-time charges, gross margins for the quarter were 15%, as compared to 25% in the prior quarter and 42% in the same quarter year-ago. Gross margins were affected due to the following reasons: