Summary
SUMMARYThis summary highlights information contained elsewhere in this prospectus that we believe is most important to understanding how our business is currently being conducted. You should read the entire prospectus carefully, including the “Risk Factors” section and the consolidated financial statements and related notes included in this prospectus, before making an investment decision.
We are the leading electronic market for trading, routing and settling communications capacity. Members of our exchange, consisting primarily of communications service providers, anonymously buy and sell voice calls and Internet capacity based on route quality and price through our centralized, efficient and liquid marketplace. Members place orders through our web-based interface. Our fully-automated, highly-scalable trading platform matches these orders using our proprietary software and delivers them through our state-of-the-art facilities. We invoice and process payments for our members’ transactions and manage the credit risk of buyers primarily through our credit management programs with third parties.
Through our exchange, members have access to communications capacity in every country in the world. As of May 31, 2004, we had 320 members who subscribed to our voice trading services, including eight of the world’s ten largest communications services providers. Approximately 55% of our members were located in North America, 31% were located in Europe and 14% were located in other regions of the world, including Asia. During 2003, our members traded approximately 8.0 billion minutes of wireline, wireless, voice over Internet Protocol, or VoIP, and other calls, representing a 60% increase over the prior year. Of these 8.0 billion minutes traded on our exchange in 2003, approximately 37% of the minutes were sent to wireless phones and approximately 63% of the minutes were sent to wireline phones. Of these 8.0 billion minutes traded, approximately 11% were transmitted through our VoIP facilities. During the quarter ended March 31, 2004, our members traded approximately 2.4 billion minutes of wireline, wireless, VoIP and other calls, representing an 11% increase over the fourth quarter of 2003 and a 41% increase over the first quarter of 2003. Of these 2.4 billion minutes traded in the first quarter of 2004, approximately 40% of the minutes were sent to wireless phones and approximately 60% of the minutes were sent to wireline phones. Of these 2.4 billion minutes, approximately 14% were transmitted through our VoIP facilities. We recently launched products and services that allow the trading of Internet capacity through our exchange. As of May 31, 2004, we had 14 members who subscribed to our Internet data trading services on a trial basis.
For the year ended December 31, 2003, we reported fee revenues of $34.0 million, net loss of approximately five thousand dollars and earnings before income tax, depreciation and amortization, or EBITDA, of $8.2 million. For the three months ended March 31, 2004, we reported fee revenues of $10.1 million, net income of $0.8 million and EBITDA of $3.6 million. By comparison, for the three months ended March 31, 2003, we reported fee revenues of $7.5 million, a net loss of $0.9 million and EBITDA of $1.2 million. For information regarding our calculation of and the reasons why management uses EBITDA, we refer you to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our operations and development, sales and marketing, and general and administrative costs are predominantly fixed in nature. We have grown, and believe we will be able to continue to grow, fee revenues significantly faster than these operating costs and expenses. For example, these costs and expenses increased approximately 5% from $6.2 million for the three months ended March 31, 2003 to $6.5 million for the three months ended March 31, 2004 while our fee revenue grew approximately 35% over the same period.
The global communications services industry continues to evolve, providing significant opportunities and creating competitive pressures for market participants. The industry has been experiencing significant changes, including the proliferation of wireless and data products and services, increased voice and data volume, declining unit pricing and the emergence of new participants due to deregulation and low-cost technologies. The growth in competition and associated fragmentation along with declining unit pricing and an industry structure that is characterized by high fixed costs have resulted in increased pressure on communications services providers’ profitability. Most communications services providers must access other providers’ networks to send and receive voice and data traffic. The process of establishing, managing and maintaining these interconnections is labor-intensive, costly, time-consuming and highly negotiated, which leads to higher installation, network management, selling, legal, billing and collection costs, creating the need and demand for a centralized and efficient marketplace.
We have created a global market where our members, through a single interconnection to our facilities, trade, route and settle voice calls and Internet capacity. Our exchange is neutral, favoring neither buyer nor seller, and allows our members to trade anonymously. Our system incorporates the following processes and attributes:
Trade
On our exchange, members can buy communications capacity to every country in the world. Our members place orders based on quality and price criteria, through our easy-to-use, web-based trading platform. We provide our members with market quality, price and volume information that helps them trade effectively on our exchange.
Route
Our proprietary software and patented processes automatically match and prioritize the orders based on the quality and price parameters that our members place on our exchange. Traffic is automatically routed from the buyer to the seller based on this order prioritization. We independently monitor and update the route quality rating of our sellers.
Settle
We manage all of the clearing, settlement and credit risk management for our members. Our members receive a single invoice from us that reflects the net amount due to or from us. We also manage the credit risk of transactions executed on our exchange through third-party financing arrangements, prepayment programs, cash deposits and letters of credit. This enables us to pay our sellers regardless of whether we have collected payment from the buyers.
Our exchange provides many benefits to our members. By trading, routing and settling voice calls and Internet capacity through our exchange, members can access multiple buyers and sellers, increase network utilization, achieve better pricing and improve profitability and cash flow by reducing the number of interconnections, reducing selling, legal, billing and collection expenses and eliminating disputes and bad debt.
Our mission is to provide the trading platform where virtually any digital good can be traded. The key elements of our strategy are:
Expand our voice business through the following initiatives:
Leverage our trading platform, intellectual property and operations support systems to offer a trading platform for other digital goods. We believe that we can leverage our web-based trading systems, intellectual property portfolio and operations support systems to allow for the trading, routing and settlement of other digital goods and offer additional services. As an example, we recently launched an automated full service web-based trading platform for Internet capacity on a trial basis. Internet capacity can be bought or sold on our exchange in a manner similar to our voice offerings. Members are able to enter orders with quality and price specifications. We deliver the capacity over our proprietary platform and handle all billing and settlement functions.
We were incorporated in Delaware in November 1996 as SmartGroup Holdings, Inc. In July 2002, we changed our name to Arbinet-thexchange, Inc. Our principal executive offices are located at 120 Albany Street, Tower II, Suite 450, New Brunswick, New Jersey 08901. Our telephone number is (732) 509-9100. Our website address is www.arbinet.com. The information on our website is not incorporated by reference into this prospectus and should not be considered to be a part of this prospectus. We have included our website address as an inactive textual reference only.
Unless otherwise stated, all references to “us,” “our,” “Arbinet,” “we,” the “Company” and similar designations refer to Arbinet-thexchange, Inc. and its subsidiaries. Arbinet® and Arbinet-thexchange® are registered trademarks of Arbinet-thexchange, Inc. ThexchangeSM, voice on thexchangeSM, OptimizedVoiceSM, SelectVoiceSM, PrimeVoiceSM, data on thexchangeSM, OptimizedIPSM, SelectIPSM, PrimeIPSM, SwitchAxcessSM, RapidClearSM, BilateralAxcessSM, AxcessCodeSM, AxcessRateSM and CreditWatchSM are service marks of Arbinet-thexchange, Inc. Our logo, trademarks and service marks are the property of Arbinet. Other trademarks or service marks appearing in this prospectus are the property of their respective holders.
The number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding as of May 31, 2004. The number of shares of our common stock to be outstanding after this offering does not take into account:
Unless otherwise noted, the information in this prospectus assumes that the underwriters do not exercise their overallotment option granted by us and the selling stockholders, and has been adjusted to reflect the 1-for stock split of our common stock effected on , 2004, the automatic conversion of our outstanding shares of series A-1 preferred stock, series C preferred stock, series C-1 preferred stock, series D preferred stock, series D-1 preferred stock, series E preferred stock and series E-1 preferred stock into an aggregate of 271,859,194 shares of common stock upon the completion of this offering, the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated by-laws upon the completion of this offering. All of the outstanding shares of series B preferred stock and series B-1 preferred stock will be redeemed upon completion of this offering.
The following tables present summary consolidated financial information, which has been derived from our consolidated financial statements. You should read this information in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all included elsewhere in this prospectus.
A reconciliation of EBITDA to net income (loss) follows: