Net2Phone - Press Releases - October 24, 2002

Net2Phone Reports Q4 and Fiscal Year 2002 Results
Company to recognize $58.4 million gain in Q1 03 from settlement with Cisco
First phase with Liberty Cablevision completed
54% quarterly EBITDA improvement

NEWARK, NJ - October 24, 2002 - Net2Phone, Inc. (Nasdaq: NTOP), the leading provider of Voice over IP (VoIP) services, today announced its fourth quarter and year end results for fiscal year 2002.

Net2Phone CEO Stephen Greenberg commented, “At the end of my first year as CEO of Net2Phone, I am pleased to report improvements to all aspects of our bottom line, which relates directly to the focus on quality of revenue that I established as a goal one year ago. We will continue to focus on our core competencies in international channel sales while hopefully creating spectacular upside with our new broadband voice technology. Continuing to keep our expenses in line while protecting our cash position will enable us to move forward and innovate.”

Fourth Quarter Review
Revenues for the fourth quarter were $26.6 million, a 13% quarterly decline due to an overall weakness across telecom that adversely impacted carrier activity in the Company’s wholesale business (IP minutes carried on behalf of domestic and international carriers).

The Company has reaffirmed its decision to limit its wholesale business, as the market for wholesale telecom services does not present the kinds of opportunities for growth and profit margins that are consistent with Net2Phone’s plans. The Company had managed its wholesale division for profitability over the past few months, providing the Company with additional revenues, and will limit its wholesale activity to existing customers. This decision has been rewarded with significant improvements during the quarter and fiscal year in SG&A expense reductions and improved gross margins.

EBITDA loss (excluding restructuring and other charges) was ($5.4) million, a 54% improvement over the corresponding ($11.7) million EBITDA loss (excluding restructuring and other charges) in the third quarter of fiscal 2002 and a 68% year over year improvement.

Gross margin for the fourth quarter was in line with guidance at 43%, driven by the Company's continued ability to lower termination and connectivity costs while maintaining relatively stable average revenue per minute for both domestic and international traffic. SG&A expenses for the quarter dropped by 33% from last quarter, and 30% year over year as the Company has reduced costs, including headcount, to align its cost structure with revenues.

INTERNATIONAL CHANNEL SALES
In the fourth quarter, Net2Phone’s International Channel Sales team grew revenues by 18% from the third quarter. This group sells integrated Voice over IP solutions through channel distribution to consumers, Internet cafes, and small-to-medium sized businesses on a global basis.

The Company has put special emphasis on exploiting opportunities in India, which liberalized its telecommunications marketplace on April 1. Net2Phone has since signed up six Tier-1 ISPs, including two RBOC-equivalents, to distribute its integrated VoIP solutions through their channels directly to end users, and has also opened a regional office in Southeast Asia to accelerate continued efforts in that region.

BROADBAND
The Company notes that its current pilot with Liberty CableVision of Puerto Rico is thriving, with Phase 1 of the pilot reaching its conclusion this month. In Phase 1, the Company successfully deployed its end-to-end broadband solution to 100 subscribers. The Company expects to begin Phase 2 before the end of the calendar year, which includes proving the scalability of the solution, and testing various marketing strategies and the business offering for this system.

“In late 2001, Net2Phone approached us with a plan to test and outsource an IP telephony service to them, and they said they'd have it all done in less than six months. We were skeptical at first, but were enticed by the possibilities and consequential opportunities of a successful trial. Net2Phone certainly impressed us by delivering a toll-quality outsourceable telephony solution before their own deadline. We look forward to expanding our relationship with them,” said Jose Alegria, General Manager, Liberty Cablevision of Puerto Rico.

FISCAL YEAR 2002 REVIEW
Results for the fiscal year also speak to the Company’s focus on quality of revenue. Revenues for the fiscal year were $138 million, down 8% from fiscal year 2001. Gross margins for the year improved by 15 percentage points to 43%, up from 28% last year, all driven by the Company’s focus on bottom line improvements. EBITDA loss (excluding restructuring and other charges) for the year also dropped significantly, with a 49% year over year improvement to ($52.0) million. Net loss for the year was ($247.9) million, a 32% improvement over last year’s net loss of ($366.5) million.

CASH/ ADIR
Cash, cash equivalents, marketable securities and related investments as of July 31, 2002 were $109 million. At the end of the fourth quarter, Net2Phone settled its litigation with Cisco, resulting in the transfer of all Cisco and Softbank Asia Infrasructure Fund’s minority interests in Adir back to Net2Phone, in addition to a cash settlement paid by Cisco in Q1 2003. As a result, the Company will recognize a gain of $58.4 million in Q1 2003.

LAB CONSOLIDATION
As Net2Phone’s business strategy becomes more focused on the convergence of technologies, and as the components becomes more standards-compliant, the Company is consolidating the development and support of its products for both its core business and its broadband effort within one unit working on standards-based solutions that will service the entire organization. This consolidation will reduce the Company’s staff by 20%, or 63 employees, resulting in an annual cost savings of approximately $9 million. The Company will record a restructuring charge for this consolidation, which includes severance payments and office space reduction expenses, during Q1 FY03 (ended October 31, 2002).

About Net2Phone
Founded in 1995, Net2Phone is a leading provider of voice services over IP networks to consumers, businesses and carriers worldwide. With millions of users around the world, Net2Phone enables toll-quality calls between computers, telephones, and broadband devices utilizing IP networks. Recognized as the first Company to bridge the Internet with the public switched telephone network, Net2Phone has routed billions of minutes of traffic over its award-winning network. Incorporated within the Company is its Cable Technologies Group, which has developed a fully outsourced standards-compliant telephony solution for cable operators. Traded on the NASDAQ under the symbol NTOP, Net2Phone’s strategic partners and investors include Liberty Media Corporation (NYSE: LMC.A; LMC.B), AT&T (NYSE: T), and IDT Corporation (NYSE: IDT; IDT.B). For more information about Net2Phone's products and services, please visit www.net2phone.com.

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward- looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. For this purpose, any statements contained in this press release that are not statements of historical fact may be deemed to be forward-looking statements. Factors which may affect the Company's results include, but are not limited to, the Company's ability to expand its customer base, the Company's ability to develop additional and leverage its existing distribution channels for its products and solutions, dependence on strategic and channel partners including their ability to distribute the Company's products and meet or renew their financial commitments, the Company's ability to address international markets, the effectiveness of the Company's sales and marketing activities, the acceptance of the Company's products in the marketplace, the timing and scope of deployments of the Company's products by customers, fluctuations in customer sales cycles, customers' ability to obtain additional funding, technical difficulties with respect to the Company's products or products in development, the need for ongoing product development in an environment of rapid technological change, the emergence of new competitors in the marketplace, the Company's ability to compete successfully against established competitors with greater resources, the uncertainty of future governmental regulation, the Company's ability to manage growth, obtain patent protection, and obtain additional funds, general economic conditions and other risks discussed in this Report and in the Company's other filings with the Securities and Exchange Commission. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to the Company as of the date thereof, and the Company assumes no obligation to update any forward-looking statement or risk factors.