OCen Hears Future Calling With Internet Phone Service to Asia

Think of communication on the Internet and what likely comes to mind is electronic mail, online bulletin boards or maybe instant messages.

But text-based communication is only the beginning. Internet-style networks are increasingly carrying out tasks--such as transmitting voices and faxes--that were historically handled by traditional phone circuits. Worldwide, 2.7 billion minutes of phone calls were carried on Internet protocol, or IP, networks last year, and that could jump to 135 billion minutes by 2004, according to market researcher International Data Corp.

In the coming years, analysts expect services such as videoconferencing to take advantage of Internet technology as well. Total global revenue for such Internet-based services could reach $91.5 billion by 2006, according to forecasts from research firm Frost & Sullivan. If the forecasts are correct, Asia will account for between 20% and 25% of that revenue, creating a market worth an estimated $19.2 billion six years from now.

That’s the market 2 1/2-year-old OCen Communications is targeting. The Irwindale company has built a private IP network connecting Los Angeles to Asia that serves customers in Japan, South Korea, the Philippines, Taiwan and a large swath of eastern China.

Last month, OCen (pronounced “oh-sen”) filed to raise as much as $90 million in an initial public offering, which could come in the next few weeks.

For its first two years, OCen--which stands for open communications enterprise network and means “profound telecommunications” in Chinese--sold discount calling cards to mostly U.S.-based customers, who used them to call or send faxes to Asia. In the last three months of 1999, more than 18.5 million minutes of calls were transmitted over its IP network.

U.S. consumers helped OCen generate revenue to offset the cost of switches, gateways and other telecommunications equipment it needed to build its network. (The actual IP lines are leased from providers such as Global Crossing and Qwest Communications International.) Now that its network is largely built, OCen plans to sell its services primarily to corporate customers in Asia and to other carriers who would resell the access to consumers.

“The margins in the corporate and carrier businesses are much higher, and the growth rates in those businesses are higher,” said Ben Ho, OCen’s director of marketing and sales. “The consumer business is a good business, but it doesn’t offer as much profitability.”

That could be a lucrative shift, said Tom Taulli, a Santa Ana-based Internet stock analyst for Internet.com who follows initial public offerings. Taulli also praised OCen’s focus on Asia, since long-haul phone traffic stands to reap the biggest cost savings from IP telephony services.

“It’s a pretty smart strategy, and they’re targeting the right markets,” Taulli said. “The Internet is starting to take off overseas, and it will probably grow a lot faster [there] over the next few years.”

It had better, if OCen wants to get out of the red. The company had racked up an accumulated deficit of $9.3 million by the end of 1999, and it expects to “incur significant losses for the foreseeable future,” according to its filing with the Securities and Exchange Commission.

OCen’s revenue is growing briskly, to just under $2 million in the fourth quarter of 1999. That’s 24% above the company’s revenue in the third quarter and more than 30 times greater than the fourth quarter of 1998. But more than three-quarters of OCen’s revenue comes from just four customers, and its biggest customer owes OCen more than $815,00, most of which is past due, according to the filing.

The company’s “cost of revenues”--including network access, transmission and termination fees--is greater than its actual revenue, and it is growing as well. OCen spent $3.4 million on such expenses in the fourth quarter of 1999, a 79% increase over the third quarter and 12 times more than the same quarter the previous year. Other expenses, particularly general and administrative, are also on the rise.

Altogether, OCen lost $8.2 million in 1999 on revenue of $4.2 million, and more than half of that loss came in the fourth quarter, the most recent period for which figures are available. As of Dec. 31, the company had a little more than $2 million in cash on hand. But the company points out that the financial data in its filing is primarily based on sales to consumers and doesn’t reflect its new push to serve corporate customers and other carriers.

And that’s where the action is, according to Mark Winther, group vice president of worldwide telecommunications for International Data in New York. Though on the wholesale front OCen faces competition from the likes of Internet phone carriers IBasis and ITXC, it is the first company to target the previously overlooked Asian business community, he said.

“Most of the Internet telephony plays are aiming at consumers, who tend to be very cost-sensitive but not so quality-sensitive,” Winther said. “Businesses are the reverse--very quality-sensitive but not so price-sensitive. It’s been very hard to get them to run over to the IP platform just because it’s cheaper.”

OCen’s OPhone service gives businesses a virtual private network to connect employees in a company, even if they are spread among several countries in Asia. Instead of dialing 10 or 12 digits to place an international call, OPhone customers need only dial four.

“It’s more convenient, it’s a managed solution and it’s cheaper,” Winther said. “I think it’s going to work for them.”

Telecom titans such as AT&T;, Concert and Global One offer such services, but only to global Fortune 500 customers who are willing to buy “an enormous amount” of capacity, Winther said.

By the end of the year, OCen plans to roll out a product called CommPortal that will offer phone and fax services, voicemail, teleconferencing, instant messaging, videoconferencing and real-time document collaboration.

The stock market performance of OCen’s competitors is also a positive sign, analysts said. While shares of other companies that have gone public recently are trading below their IPO price, both Burlington, Mass.-based IBasis and Princeton, N.J.-based ITXC are up. In Nasdaq trading Friday, IBasis closed up 56 cents at $22.63, up 41% from its IPO price of $16 in November. ITXC closed up 13 cents at $26.81, up 123% from its $12 IPO price in September.

Still, the entire market for IP-based services is young, and customers could be reluctant to adopt the new technology in spite of rosy forecasts from analysts. Companies might also be reluctant to switch from well-known telecommunications providers to a relative unknown like OCen.

There are also risks inherent in operating in Asia. Another economic downturn could hurt business prospects there, and unfavorable exchange rates could lower the value of revenues collected overseas. Political or social unrest could also affect the company, as could increased government regulation.

For that matter, if the U.S. regulators were to decide that calls carried on IP networks were subject to the same taxes as calls on traditional phone circuits, the cost advantage of OCen’s services would decline significantly. But some observers, like Winther, think the IP telephony market is still too small to attract much attention from regulators. Besides, he said, the general trend around the world is to decrease--not increase--regulatory burdens.

Still, with greater risk comes a greater potential upside for investors, Taulli said. Without any sizable competitors, he said, OCen has a reasonable chance of building a big customer base and becoming a major player--or attracting a buyout offer from one.

OCen Communications has not yet specified how many shares it plans to sell to the public or how much the shares will cost. Lehman Bros. is the lead underwriter, with Bear, Stearns & Co. and ING Barings also working on the deal. OCen’s stock would trade on Nasdaq under the symbol OCCM.

*

Times staff writer Karen Kaplan can be reached at karen.kaplan@latimes.com.