When I first downloaded the Skype Mobile App, I had a thought that was undoubtedly shared by many in the same situation: Namely, if you can make calls via wireless internet, then is the traditional function of the phone rendered obsolete? Many of us, of course, soon discovered that Skype was far too data-intensive to replace the native phone functions without high-quality and stable WiFi. However, in the long-term, the broader question posed by Voice over Internet Protocol (VoIP) technology, which allows conversations over internet rather than radio tower channels, remains.
The effect of "Over the Top" (OTT) applications that build on mobile networks to bypass native functions has already been felt in the SMS space. Messaging apps on phones cost carriers $26.3 billion in 2013, according to Ovum Consulting. Not only are carriers losing out on revenue, they are essentially paying for the capacity and bandwidth that allows such undercutting. Such developments have led some emerging market telecoms to stop offering SMS services altogether.
So how will mobile operators protect their turf? One Horizon Group (NASDAQ:OHGI), headquartered in London, has devised a solution. The company's proprietary "SmartPacket" technology is ten times more efficient than traditional Session Initiated Protocol (SIP) systems such as Skype, which were initially designed for static Ethernet connections. By approaching and working with carriers directly, One Horizon allows carriers to monetize their data channel and prevent cannibalization. The process, which as mentioned is ten times more efficient than peer VoIP services because it uses fixed-line infrastructure, is a natural fit with mobile operators who have typically purchased the right to operate the fixed-line from the government.
Of course, many readers here are serial text messagers like the author, and may be scratching their head at the idea that SMS is dying out. So it is perhaps a logical next step to point out that these developments are not happening in the North American mobile market, which is a more mature industry than in the areas in which One Horizon operates: namely China, the Philippines, and soon to be Russia, according to management. As smartphone penetration is not quite as widespread as in developed markets, and in fact China is in the process of retrofitting feature phone factories to accommodate newer smartphone demand, patterns of mobile development are actually responding more quickly to changes in technology.
One Horizon, whose customers include many high-level operators in Asia, is at the forefront of many such changes with its software coded entirely in-house. In addition, its proprietary voice application has innovative features such as bandwidth adjustment, in which the quality (and thereby the data usage) of the call is changeable on the fly. The application is especially useful to migrant populations and travelers, who have to call outside the local area and are faced with either expensive calling cards, prohibitively expensive out-of-country minute rates, or existing VoIP applications that struggle to maintain signal clarity on the go.
The strategy so far has manifested itself in the aforementioned partnerships with tier-one and tier-two carriers, which include some of the fastest-growing companies in the world in the emerging market telecom space. In addition, One Horizon has leveraged two Chinese JV partners to engage the highly-coveted mobile space serving the world's largest population. As such, the company is able to go top-down by engaging operators and partner with organic local applications that have proven themselves on the ground.
And how has this ambitious technology-driven strategy translated? As of June 30, 2012 was the first period in which the company recorded operating revenue, of USD equivalent $5.2 million, although it was still operating at a net loss. However, by the end of the year, it was running a $4.6 million net operating gain, and as of the most recent quarterly period of September 30, 2013, recorded $5.27 million in net operating revenue. The shares currently trade at 13.7 times earnings, below the industry average ratio of 16.2 (according to FactSet Research Systems) and has under $300,000 worth of long-term debt, as opposed to over $29 million worth of equity and a market capitalization of over $176 million.
Share growth, however, has been somewhat stagnant over the past year. The company, which currently trades OTC, is according to management, in serious negotiations to graduate to a bigger exchange by the end of the year. Perhaps this move will allow the company to experience greater share growth off its promising story and solid numbers. In any event, One Horizon has the technology and the overall capacity to become a major global player in a relatively young sector and profit from development in one of the fastest-growing regions in the world. It certainly warrants a look from small cap investors.