Telecom Metamorphosis

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Telecom Metamorphosis
William Quigley Managing Director Clearstone
Venture Partners
Emerging Telephony Conference January 24-26, 2006
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Clearstone Venture Partners
Founded in 1997 Great success in Internet,
Software, Services Investing out of 3rd Fund.
First and second funds among top industry
performers Investment Focus Wireless, VoIP,
Security, Consumer, Biometrics, Service
Providers Excellent limited partners (MIT,
CalTech, Univ of California, CALPERS, Goldman
Sachs, JP Morgan, Dell, others)

• Early investors in
• Overture
• Paypal
• NetZero
• Good Technology
• PeopleSupport
• MP3
• Citysearch
• CarsDirect
• Meru Networks
• Idealab

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A Time of Transition
Telecom service companies are going through a
metamorphosis A whole new set of players are
emerging as competitors After long hiatus,
attractive investment opportunities returning to
telecom sector
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Top 5 Global Internet Market Cap Leaders
Google Yahoo eBay Yahoo!Japan Amazon
2B market value pre 2000 IPO 178B
market value Nasdaq peak 32B market value
Nasdaq trough 280B market value 2006
Source Morgan Stanley
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Why are VCs still Interested in Telecom?

• Volatility/uncertainty is a good thing for
  investors
• 10s of billions riding on the right answer
• So many divergent opinions today.

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Only One Quadrant Makes Serious Money

Non Consensus View
Consensus View
Incorrect Prediction
Correct Prediction
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Possible Headlines in 2010?
RBOCs dissolve. Cable MSOs run Americas
communication networks RBOCs and MSOs unite.
Ebay/Skype et.al. control phone network. End of
era for toll calls
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The Contrarian Case
Incumbents are not going away

• Consumer wireline represents just 20 of EBITDA
  (and 10 of FCF)
• Wireless EBITDA margin stabilizing at 36 to
  38
• Wireless substitution will eventually stabilize
  at 20 of US homes
• Incumbents investing 60B over next 5 years

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Incumbents Choosing to Fight

FTTX Homes Passed
2005 7M 2006 18M 2010 54M
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We Value Companies On Cash Generating Ability

• Telecom service sector not overvalued
• 15 EPS
• 14.7 FCF
• 6.5 EBITDA
• Yet enormous data, entertainment and mobile
  services business up for grabs

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Cable Threat Manageable
MSOs Behaving Rationally

• Comcast, TWC raising rates by 3 to 6
• Cable telephony totaled 5 million subs end of
  2005using non predatory pricing
• Cap Ex spending flat

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What Piqued Our Interest in VoWLAN?
Over half of businesses using VOIP by 2006 100M
dual mode phones by 2009 at points Development of affordable SIP WiFi
handsets precursor to dual mode 400 VoIP
service providers in North America in
2005 Spectralink financials compelling
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Economics of An Early VoWLAN Player

• We were motivated by the financial metrics of
  Spectralink
• VoWLAN pure play
• 70 gross margins
• Trading at 5X revenues
• 10 year old technology requiring 1,000

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Wireless Minutes Are Surging

• 0.11

850
0.11
800
0.10
750
700
0.09
Average MOU
650
Average Price Per Minute
0.08
600
550
0.07
Average MOU
Average Price Per Minute
500
0.06
450
2003
2004
2005
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Drivers For VoWLAN Deployments
Most enterprises running converged networks in 2
to 5 years 2/3 of all network connections will be
mobile by 2009 Fixed mobile convergence underway
in Asia
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Asia Adopting VoWLAN First

• Japan and Korea most aggressive in VoIP mobility
  deployment
• Yahoo BB was the catalyst
• Asian enterprise customers willing to accept
  first generation product
• Osaka Gas was first big deployment
• 50 Offices 10,000 DoCoMo 3G/WLAN phones

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Drivers For FMC VoWLAN Deployments

• 86 of employees spend at least one day per week
  outside of office
• Yet enterprise IP systems do not serve mobile
  employees
• 35 of mobile calls are inter-office
• Yet mobile telecom spending not part of
  enterprise communication platform
• Enterprises ready for PBX features on mobile
  phones

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Learnings From Our FMC Investments
Enterprise rollouts not like initial RIM
deployments ROI is impressive but not driving the
buying decision If enterprise committed to VoIP,
then VoWLAN and FMC next logical
step Underestimated need for diagnostics and RF
environment visualization tools
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Clearstones VoIP/WiFi Investment Interests
VoIP security RF security, not just packet
based Next generation access points all software
based? part of WiFi client? Monitoring and
management platforms
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Applications Drive Value in The VoIP Network
Software becomes the dominating factor for adding
value fertile ground for start-ups Voice just
another appbut QoS sensitive Emerging new
opportunities like Hosted IP and Managed
Services
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A Non Consensus Bet
CBeyond Communications
Performance Highlights
Valued at 2X Market Multiple
Started in 2001! All IP based carrier Delivering
voice mng svs 160M run rate 70 gross margins
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