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posted: 3/23/2014 6:11 AM

WhatsApp deal has MagicJack CEO talking billions

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  • The WhatsApp Inc. mobile-messaging application WhatsApp and a Facebook Inc. logo are displayed on an the screens of mobile handsets.

      The WhatsApp Inc. mobile-messaging application WhatsApp and a Facebook Inc. logo are displayed on an the screens of mobile handsets.
    Bloomberg News

 
Bloomberg News

Facebook Inc.'s $19 billion acquisition of WhatsApp Inc. got the attention of executives in magicJack VocalTec Ltd.'s West Palm Beach offices.

Three weeks after the Feb. 19 deal, they dedicated part of their quarterly earnings call to point out the similarities between MagicJack's business and WhatsApp's -- a growing number of subscribers for a mobile phone application that allows users to communicate for free. Asked a week later whether he was looking for a buyer, magicJack Chief Executive Officer Gerald Vento called it a "very appropriate question" before going on to say that he's "never worried about exit strategy."

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MagicJack's stock price, in the meantime, is surging. The shares have rallied 99 percent this year to a 1 1/2 year-high as the company reported better-than-expected fourth-quarter earnings and hedge fund manager Whitney Tilson named it one of his stock picks. Facebook's takeover of WhatsApp, the biggest Internet acquisition in more than a decade, followed Japanese online retailer Rakuten Inc.'s $900 million purchase of the Viber Internet messaging and calling service.

"I'm not surprised that a company like magicJack would want to ride on the hype of the Facebook acquisition," Brian Blau, research director in consumer technologies at Gartner Inc., said by phone from San Francisco on March 14. The WhatsApp deal "raises the value of messaging, and it raises it to the height that maybe wasn't thought of before, or wasn't thought of as realistic."

Cheap Alternative

magicJack, whose main product is a device that connects to a computer or router to enable voice calls over the Internet, is revamping its mobile application as it seeks to benefit from the same business model of free communication services offered by Viber and WhatsApp. It markets itself as a cheap alternative to landline and mobile phone plans, charging an annual fee of $29.95 to make calls with the device to the U.S. and Canada.

"There's billions and billions of dollars in market capitalization at play here, and we believe we're in the right place at the right time," Vento said in a March 17 telephone interview from Boston. "We clearly view ourselves not just in the device space, but in the app space."

WhatsApp has more than 450 million members, with one million users being added daily. Viber has 300 million users of its instant messaging and free Internet phone services. magicJack said in a March 12 earnings call that registered users of its free app jumped 23 percent to 6.9 million in the fourth quarter from the previous three months. Of those, 3.3 million used the app in the past 30 days, it said.

Crowded Field

magicJack has a "significant" number of active app users, but not enough to attract a bidder, Blau said. It needs to break into the mobile application business because the value of voice services is declining across the industry, threatening its niche as a low-cost provider over the next five to 10 years, he said.

To lure a buyer, magicJack will have to distinguish itself in a crowded field of competitors by touting its low cost, offering high call quality, and addressing data privacy concerns, said Scott Kessler, an analyst at S&P Capital IQ.

"There is no shortage of options for people," Kessler said in a March 14 telephone interview. "Companies can talk about how they're using IP-based platforms to enable mobile communications, but there's a big difference between doing it, and doing it with the level and scale and success that WhatsApp has achieved."

WhatsApp will be introducing voice functionality later this year, making it a more attractive product, CEO Jan Koum said on Feb. 24.

Premium Services

magicJack can differentiate itself from WhatsApp and Viber because its service allows users to call any fixed or mobile phone line, not just people who are using the same application, according to CEO Vento, who previously headed TeleCorp PCS Inc., which was sold to AT&T Inc. in 2002 for $5.7 billion.

The shares rallied 20 percent to $21.04 on March 13, a day after the company reported fourth-quarter earnings that beat analyst estimates and forecast revenue of $163 million in 2014, surpassing analysts' average projection of $148 million. magicJack is the biggest gainer on the Bloomberg Israel-US Equity Index of the largest New York-traded Israeli companies this year.

Canaccord Genuity Inc. raised last week its price estimate for magicJack to $24 from $17, citing better-than-forecast earnings and a renewed advertising campaign.

'Upside Scenario'

Tilson said last month that MagicJack's marketing push could result in rapid subscriber growth and stock appreciation.

"I don't own the stock because I think someone's going to pay a silly WhatsApp kind of price for magicJack," Tilson, who oversees $70 million at Kase Capital Management in New York, said in a March 13 interview. "But it's a nice possible upside scenario."

Tilson said his firm owns more than the 0.9 percent stake in magicJack that was reported in a Dec. 31 regulatory filing.

"WhatsApp being acquired for $19 billion or Viber being acquired for $900 million indicates that voice is a significant opportunity," Chief Operating Officer Tim McDonald said in a March 13 telephone interview. "We have a role to play in the market."

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