Company Continues Growth in Outsourcing; Returns to Growth in Retail Business
BURLINGTON, Massachusetts – 10/21/2008 – iBasis, Inc. (NASDAQ: IBAS), a KPN affiliate, today announced results for the third quarter ended September 30, 2008.
On October 1, 2007, iBasis acquired KPN Global Carrier Services. As this transaction has been treated as a reverse acquisition of iBasis by KPN Global Carrier Services under the purchase method of accounting, the financial results of KPN Global Carrier Services have become the historical financial results of the combined company and replace the historical financial results of iBasis as a standalone company for periods prior to the closing of the acquisition. Thus, the GAAP financial results for the third quarter of 2007 include only the results of KPN Global Carrier Services. Historical GAAP results for KPN Global Carrier Services as a wholly-owned subsidiary of Royal KPN are not necessarily indicative of results that would have been achieved on a standalone basis.
To make comparisons to prior periods more useful, we are providing supplemental pro forma data which include the consolidated historical results of both iBasis and KPN Global Carrier Services. These consolidated historical results are not necessarily indicative of results that would have been achieved on a combined basis. Q3 2008 was the fourth quarter since completing the KPN transaction. Therefore, beginning with Q4 2008 results, quarterly comparisons will be made using actual rather than pro forma results.
Revenue for the third quarter of 2008 was $338.0 million, and net income was $3.3 million, or $0.05 per share. For the third quarter of 2007, pro forma revenue was $367.5 million, and pro forma net income was $0.7 million.
Adjusted EBITDA for the third quarter of 2008 was $10.3 million, compared to pro forma Adjusted EBITDA of $10.4 million for the third quarter of 2007. Adjusted EBITDA is a non-GAAP measurement presented to provide further information about the Company’s operating trends.
Comments on the Third Quarter
“In Q3 our Trading business declined sequentially, primarily due to what we believe is a downturn in the U.S. calling card market that is impacting several of our Trading customers, including calling card providers and other wholesale carriers who pass traffic from calling card providers to iBasis,” said Ofer Gneezy, president and CEO of iBasis. “This customer segment accounted for approximately 10% of our Trading traffic in Q3. We believe the decline in the calling card market is driven by the downturn in the U.S. economy, which is having a negative effect on immigrant communities that comprise the bulk of the calling card market.
“Despite the overall decline of the calling card market, our Retail business achieved strong growth in revenue and minutes and flat gross profit. We believe the improvement in Retail is the result of the success of new products we introduced in early Q3 and the adoption of more transparent pricing across the industry, a trend we advanced with the iBasis TruePrompts policy.
“Our Outsourcing business grew in minutes, revenue and gross profit, although not at the rate we expected. Outsourcing now represents more than one-third of our gross profit.
“Our results for the quarter were also negatively impacted by the decline of the Euro relative to the Dollar. The translation of Euro-based revenues to U.S. dollars resulted in an $8 million reduction in consolidated revenue compared to the second quarter. In addition, because 30% of our Trading business involves buying in one currency and selling in another, those traffic streams are affected by currency exchange. The rapid weakening of the Euro during the quarter temporarily caused some of those traffic streams to be less profitable and others to be less competitive until we adjusted our pricing to reflect the new exchange rates. Our systems and processes are designed to deal with these fluctuations, but the changes in the exchange rates during Q3 were extraordinary.
“The end of the third quarter marks the first anniversary of our transaction with KPN. We had two major objectives for the past 12 months: growth and integration. While our business has been flat, we have reigned in capital expenditures to maintain our cash flow, and we have made solid progress on our integration projects. Our financial results are beginning to reflect the synergies, as indicated by our operating expenses in Q3 being the lowest since the closing of the transaction in October 2007. We expect our financial results to reflect greater integration benefits as we draw closer to the completion of these projects in Q2 2009. To further capture synergies, following legally mandated consultations, we intend to restructure our operations in the Netherlands. We expect that iBasis Netherlands will become primarily a sales and product management office, with strategic support from other functional areas. Going forward, we will be reducing the operational services we purchase from KPN as integration projects are completed.
“In addition, we will work globally to reduce operating expenses. We will continue to focus on completing the remaining integration projects and on achieving operational synergies while prudently pursuing growth opportunities in light of the downturn in the global economy.”
Sources of Revenue — Q3 ’08
($ in millions) Wholesale Trading Outsourcing/th> Retail Total
Minutes (in billions) 4.5 0.7 0.7 5.8
Revenue $238.1 $70.5 $29.4 $338.0
Gross Profit* $17.9 $11.8 $2.7 $32.4
Gross Margin 7.5% 16.7% 9.1% 9.6%
* Revenue less data communications and telecommunications costs
Operational Milestones and Stock Repurchase Program
Minutes of use on The iBasis Network in Q3 2008 was 5.8 billion, a decrease of 6% compared to pro forma traffic of 6.2 billion minutes in Q3 2007 and 6.2 billion minutes in Q2 2008. Average revenue per minute was 5.78 cents, compared to pro forma 5.91 cents in Q3 2007 and 5.84 cents in Q2 2008. Average margin per minute was 0.55 cents, compared to pro forma 0.55 cents in Q3 2007 and 0.61 cents in Q2 2008.
During the third quarter, the Company repurchased an aggregate of 2.5 million shares of iBasis common stock at a cost of $10.1 million.
In light of the current challenging business conditions and downturn in the global economy, we believe that our financial results for Q4 will be similar to those for Q3. Capital asset expenditures for 2008 are expected to be $15 to $16 million. For 2009, we expect modest growth in revenue and a substantial increase in Adjusted EBITDA as we more fully benefit from the completion of our integration projects.
Q3 Results Conference Call
iBasis will host a conference call to discuss the Company’s selected Q3 results, led by Ofer Gneezy, iBasis president & CEO on October 21, 2008 at 5:00 p.m. ET. The public is invited to listen to the simultaneous webcast by logging in through the iBasis investor relations website athttp://investor.ibasis.com.
Founded in 1996, iBasis (NASDAQ: IBAS) is a leading wholesale carrier of international long distance telephone calls and a provider of retail prepaid calling services and enhanced services for mobile operators. iBasis customers include KPN, KPN Mobile, E-Plus, BASE, TDC, and many other large telecommunications carriers such as Verizon, Vodafone, China Mobile, China Unicom, IDT, Qwest, Skype, Telecom Italia, Telefonica, and Yahoo. In October 2007, iBasis acquired KPN Global Carrier Services to create one of the three largest carriers of international voice traffic in the world (1), and KPN became a majority stockholder of iBasis. On a pro forma basis, the combined company carried approximately 24 billion minutes of international voice traffic in 2007. The Company can be reached at its worldwide headquarters in Burlington, Mass., USA at +1 781-505-7500 or on the Internet athttp://www.ibasis.com/.