A provider of local, long-distance and enhanced telecommunication services, Z-Tel rode a wave of investor enthusiasm for telecom stocks in the late 1990s. Its shares soared to nearly $50 in late 1999. But by 2002, the shares plummeted to below $1.
It's been a struggle, but Z-Tel's management team, led by founder and CEO Gregg Smith, has persevered. The company has pared overhead and struck a deal with Sprint when a key partnership with long-distance carrier MCI soured. "We've proven we can get through the tough times without stumbling too badly," Smith says.
Now, the company's push into the new technology of phone calls over the internet is generating buzz. Z-Tel shares have bounced from a low of 60 cents to a high of more than $4.75 before settling at about $3 in early March.
Proponents say voice over the internet, or VOIP, promises to revolutionize the way businesses and individuals communicate. The technology allows calls to be placed or received over the internet by breaking down voice transmissions into data packets and then reassembling them on the receiving end, much like e-mail. For consumers and businesses, VOIP's lower costs will be attractive. "This is the real deal," Smith says.
Z-Tel began offering VOIP services to businesses in Tampa Bay and Atlanta this month. Other cities will follow later in the year. The company expects VOIP sales this year to represent between 10% to 20% of total revenue, which was $300 million last year. Next year, VOIP could be between 40% to 50% of sales, Smith says.
The relatively low cost of introducing VOIP is a big plus for a capital-hungry company like Z-Tel. Infrastructure expenses are a fraction of what it costs to build traditional phone service. For example, Smith says, the fixed network cost of establishing the service in southwest Florida, from Tampa south to Naples, is about $1 million vs. about $10 million for the equipment needed to set up traditional phone service.
The monthly cost of maintaining the VOIP system also is lower than a traditional phone system. Those savings are passed on to consumers.
An ideal customer for Z-Tel might be a 10-person law firm, Smith says, with 10 phone lines, a fax line and DSL connection to access the internet. Each month, that hypothetical firm probably will be paying $600 for the local phone service, $300 for long-distance service and $250 for DSL. The Z-Tel VOIP package will include the same phone lines and a faster broadband connection for $800 a month.
Aside from the marketing costs, Z-Tel will spend an additional $2,000 installing special equipment. Smith estimates it will take anywhere from six to eight months for Z-Tel to break even on customers like the hypothetical law firm.
Drawing a crowd
Z-Tel certainly won't have the field all to itself. Cable companies, telecommunications companies such as AT&T, Verizon and BellSouth, as well as other entrepreneurs like Z-Tel will be looking for a piece of the VOIP pie.
Smith says he and his team aren't afraid of competing. "We've dealt with a lot of stuff over the past six or seven years," he says. "There's a lot of experience here with dealing with complexity and change. That may be our best asset."
The first big test for Z-Tel's VOIP venture will be at the end of July, when the company releases its second-quarter financial results. "If we can point to some pretty solid progress, I think people will start to say, 'Hey, this may be the way to go,' " Smith says.