Virtutone Networks CEO Jason Allen talks to Cantech Letter

Overnight sensation? Not quite.

When Virtutone Networks (TSXV:VFX) announced that it had posted wholesale revenue of $4-million for the month of August, it might have caught some casual observers off guard. After all, it was a far cry from the $200,000 in wholesale revenue the company booked back in February.

What was this little Alberta company up to, exactly?

Turns out, that while the name stayed the same, the business behind Virtutone has undergone a transformation, pivoting away from the low-growth retail segment of VoIP and into a more lucrative wholesale business.

The upstart telco is now emerging from a period of large infrastructure investments and corporate rejigging into a market that is both predictable and enormous. Cantech Letter sat down with CEO Jason Allen to talk about his plan to double Virtutone’s revenues again next year.

Jason, can you tell us about the history of Virtutone?

Virtutone was founded to develop a reliable faxing solution over a satellite internet connection, and succeeded. The company then grew into providing VoIP phone lines to compliment its fax lines, mainly to satellite internet providers around the world. In 2010, when the drop came in the energy sector, Virtutone expanded its services to chain stores across Canada, Australia and the UK. After 7 years of standard retail VoIP of one form or another, management decided to focus on a new line of business, Wholesale VoIP. Virtutone was able to procure inexpensive minutes and sell them to other VoIP companies in Canada and the US. To be able to connect to the big telco’s in the world, Virtutone needed large carrier grade switches, which it procured and installed in 2012. March of 2013, a 25 year veteran of wholesale telecom (Louis Acevedo) joined Virtutone and he now heads up our growing sales team.

Our burn rate is pretty well set at $2 million a year so if you do the math you’ll see that we are now profitable. So as we grow, almost the entire 5% should fall directly to the bottom line.

Give me the basic breakdown of the how the business works…

It’s a simple business model – we buy minutes from one company at a set price and sell it to another company at a higher price. From a technology perspective, we use our state-of-the-art switch platform to move the minutes from the customer to the vendor. Our financial model is simple as well – we focus on business that offers us predictable healthy margins (5% gross margin). Our burn rate is pretty well set at $2 million a year so if you do the math you’ll see that we are now profitable. So as we grow, almost the entire 5% should fall directly to the bottom line.

Your wholesale revenue leapt from $200,000 per month in February to $4,000,000 per month August. What is behind that huge jump?

On the surface it looks like Virtutone was an overnight success but that is far from reality. As I mentioned earlier we’ve been in this business from the beginning. Over the past decade we developed a very specialized skill set in VoIP networks, sales and service. All of the factors that we combined in 2012, including investing $1 million in world-class carrier grade switching equipment, access to substantial working capital, and recruiting the right manpower with the right experience came together about 6 months ago.

Virtutone serves as an intermediary between large carriers and local telephone companies. Why is there a disconnection between these two entities?

Virtutone found its niche in serving as an intermediary between the large telephone companies and small markets – mainly in Latin America and Africa. Individually, the large carriers do not have a significant enough of a reason to interconnect with the small local carriers in these small countries. There is not enough of a business case for the larger carriers to go through the process of interconnecting with various small in country local telcos. Virtutone collects the traffic from many of these carriers and interconnects with the local telephone company in various countries around the world.

How large is the wholesale market?

The short answer is in the trillions of dollars. Major telco companies all over the world participate in this marketplace in one manner or another. In addition to the AT&Ts of the world there are also massive companies like BICS based in Belgium, TATA Indicom – a major telecommunications company in India, IDT Corporation and Colt Group (OTC:CLTZF) headquartered in London, England.

We’re in great shape – no further large investments are required in our infrastructure – we can handle substantially more traffic on our network than we are currently serving.

Where is the real sweet spot of your wholesale market?

Latin America and Africa are definitely where we focus our attention. The reason being is very simple. The cost per minute in Gambia is $0.34 whereas the cost per minute in Canada is $0.001 per minute. Assuming we are able to make 5% gross margin on both calls, you can see the effect of each revenue stream on our organization. Both minutes take the same amount of switching, support, sales, and overhead. It was an easy decision for us: we focus on the high cost per minute routes with decent margins.

Is there a risk of not getting paid by a client?

We primarily sell to tier one telecommunication companies so the risks are low. With that said, we are prudent in our financial management and use an escrow account services (Akirix) which provides Virtutone with the required assurances. Akirix guarantees payment from these tier one carriers which lets our CFO sleep at night.

Who are your competitors and how do you stack up against them?

Some of our competitors include Fusion Telecom (OTC:FSNN), Go2Tel, Phonetime (TSX:PHD), and Quickcom Global. In general terms, these companies try to be everything to everyone. The majority of our competitors have large amounts of North American traffic, which is difficult to manage, has high network utilization rates and very low margins. Unlike our competition, Virtutone focuses on boutique routes into smaller countries.

Why did you sell your retail division?

We were losing money every month and our direct competitors are spending millions of dollars on marketing. About a year ago we decided to re-focus our capital on money making ventures (wholesale) where we see rapid and predictable growth.

Our plan over the next 12 months is to double our revenues. We’d like to hit $10 million per month this time next year.

Can you tell us about your infrastructure investment – what did you invest in and why?

It was absolutely necessary to interconnect with the large carriers. They are sending retail traffic over our routes, so we needed the most reliable switching equipment on the market today, so we bought the industry leaders, SONUS Networks. Since the launch our system has been running smoothly and reliably with no downtime.

Let’s take a look at your balance sheet – are there more large investments necessary that investors should be aware of?

No we’re in great shape – no further large investments are required in our infrastructure – we can handle substantially more traffic on our network than we are currently serving. By the end of November, all our automation projects will be rolled out and our G&A will be fixed moving forward so, as I mentioned before, essentially all additional margins will go directly to the bottom line.

Recently you appointed new board members – can you tell us what the new members bring to the table?

Andre Brosseau has a vast financial background, as the past president of Blackmount, and CIBC world markets. His knowledge is helping us ensure the company is capitalized for the foreseeable future. Harold Baxandall, with his 33 years at Telus has a vast knowledge of the industry and a rolodex to back it up. Ron Long, with his experience at Caprock/Harris, from a technical operational standpoint in invaluable to ensure our infrastructure keeps up with our rapid growth.

What milestones should investors look for over the next 12 months from Virtutone?

Our plan over the next 12 months is to double our revenues. We’d like to hit $10 million per month this time next year. In combination with our organic growth, we have also initiated an M&A strategy. A couple of months ago we engaged a Corporate Development advisor to assist us with identifying acquisition opportunities. We’re optimistic that we will be able to further drive revenue by identifying accretive opportunities for Virtutone and our shareholders.

Disclosure: Virtutone Networks is an annual sponsor of Cantech Letter.

__________________