Interview With Xfone, Inc. (XFNE—NASDAQ OTCBB)

Despite a slight correction in the NASDAQ of late—8% in the past month—there's little to deny a significance to the recent 52 week high of the tech-laden index… that being that tech issues seems to have now not only bottomed out, but are enjoying a 'rounding of the corner' resurgence and revisal of sound investment popularity.

The natural progression of our romance with technology is such that we will always be buyers. Their provisions are too much a part of our workday and personal lives for us to be complacent and not tune into and mull over what the latest service/offering is from Microsoft, Xybernaut or Verizon. And it follows suit that as per consumer confidence levels being on the rise, so will be the public pricing of these companies. Couple that with the renewed sense of security of investment—read: Wall Street investment banking deals and analytical reporting not being so in bed together anymore—and there seems to be the making of a new arena for tech investing, one that's more mature and respectful of realistic market targets and valuations.

Realistic targets and valuations. Pardon the cliché, but 'that's the ticket.' And, true enough, it is starting to find its legs with a number of companies, but London-based Xfone, Inc. has been 'part of the solution' since its public inception in 2000, building sensibly and showing a bottom line profit. They, indeed, are a shining light in the telecommunications sector.

Xfone Inc., (OTCBB: XFNE) supplies varied long distance voice and data telecommunications services, primarily in the U.K., providing global outbound service and full business service to those physically in 28 countries, inclusive of many European nations, Australia, North & South America. They have been profitable for 4 consecutive quarters and are actively looking to remain in the black.

An Interview with Guy Nissenson, Xfone's CEO, conducted by Eric David & Sons, Inc. August 7, 2003, follows:

Eric David & Sons, Inc (EDS): It's no secret in the investment community that Telecom stocks have suffered greatly the past couple of years. That said, what is your greatest industry security and strategy for staying so positively afloat? Did the MCI Worldcom or Qwest shakeup affect your shareholder confidence at all?

Guy Nissenson (GN): Xfone's business strategy, from the beginning, has been to maintain a full service telecommunications company with a positive bottom line and positive cash flow. This is foremost in our movement forward regarding acquisitions and new customers. We do not ever consider taking on any project, affiliate or acquisition that is not profitable in its own right.

Many of our contemporaries have fallen prey to investing great deals of capital targeting only increased marketshare, but with little regard to cash flow or how it'll reflect in their profitability statement. We have been successful in creating a company without external investment and have watched it grow steadily by 50 - 100% every year in reference to both our revenue and bottom line. I regard telecommunications services much like a commodity…success is a simple equation: increase your technological and administrative efficiencies to the best they can be and you create a company with a consistently low overhead.

Regarding MCI, as understandable as it is to wish the best for your shareholders in terms of showing the greatest revenue, it was done so without looking at how to successfully integrate all of their subsidiaries properly. Additionally, of course, is the fact that telco's were especially driven up in unrealistic valuations and astronomical stock prices by analysts. Our shareholders have remained unaffected, as we have not once wavered from our fundamentals.

EDS: Judging by the services offered by Xfone, it would appear that a small businessperson or group would find a great deal of substance and efficiency in professional (ie: email to fax service, non-geographical numbers) tasks you offer. Would you say this is your typical customer/niche market?

GN: All of our customers are held in the same regard, but the small to medium-sized enterprise customer does especially favor our value added services like the non-geographical numbers and messaging. Businesses today are on the move, a great deal of that being international, so the global coverage we offer - example being a British patron moving to Chile for a two month work assignment not having to change anything in the way of services in order to maintain his business practice abroad - is especially appealing.

EDS: What's the most popular service you provide? Which contributes the largest profit margin to the Company?

GN: Our most popular service is the regular telephone carrier service based primarily here in the UK. The service that provides the company the largest profit margin is the messaging service.

EDS: How many customers do you have? What's the percentage of retail users?

GN: We have approx 10,000 customers at present. Most of those users are retail, but, realistically, retail users are longer-term patrons as they typically provide for less turn over than corporate customers.

EDS: How many countries do Xfone outbound and geographically specific service?

GN: Business outbound, we currently service customers in 75 countries, most constituted of messaging service, but our UK-based regular telephony customers can call anywhere in the world. We have access in 28 countries, access meaning that if a British customer, perhaps a business patron, travel to another country for a business assignment, they may still use all of the Xfone services. The set is a perfect travel companion. It's akin to using a travel card for all of your existing services, via a designated 1-800 #. This we find much preferable to paying huge fees to the likes of AT&T or MCI having to purchase such calling cards upon arriving in that new country.

EDS: Has management found that swings in the economy affect your Company one way, rather than another, as you offer discount services?

GN: We find that our customers initially come to us, not only for the assurance of excellence of service, but yes and, as the service is traditionally quite high in England, also for the discount to their telecommunications cost and monthly bottom line. So indeed we have found that our ranks have increased moreso during this time, but, really, our service is a smart cost cutting measure at any point in the economic cycle, so in the grand sense, the increase in our customer base is relatively consistent.

Our customers also want an integrated service. From us they get a landline in their office, a cellular, messaging service, non-geographical #'s. They get a complete package, a 'one stop shop' for all of their telecommunications needs, inclusive of billing accessible, at any time of the billing period, online. One bill for all of their services makes a simple task for their own personal or business accounting purposes. So you can see that the Xfone package of services is a wise decision no matter what the state of the economy.

EDS: How would you position yourself amongst others in your field?

GN: Our closest, albeit larger, competitors would be local companies here in Britain, like Primus, IDT and WorldCom. A smaller competitor is Alpha Telecom. That said, we are one of the only public entities in this telecom space that is profitable.

EDS: Let's chat a bit about your subsidiaries. How is Auracall doing? Do you anticipate similar acceptance and growth as the 10-10 #'s in the United States?

GN: Auracall is not growing quite at the rate at which we anticipated, but we remain positive for increased revenue in the near future. That said, it remains a profitable and high margin return sector for us, and we are confident that it will be tapping into new markets by the end of the fiscal year. We would very much like to see it kick in like the 10-10 #'s have in the United States, as those have proven quite successful.

EDS: Are you satisfied with the progress of Story Telecom, your calling card division?

GN: Story Telecom is doing tremendously well for us. It has grabbed two of the toughest markets in the UK, the Asian and African markets, offering unique calling card services. Both markets, but especially that of the Asian market, are growing at a tremendous rate and I really believe we have a solid foothold. Analyzing growth rates, the potential is phenomenal. We'll be issuing a press release very shortly about the penetration and sales success of this division, so I'll defer further comment till that point.

EDS: Further on the note of offering extended communication services, is there any consideration of tapping into the growing opportunity for ISPs/broadband or satellite providers?

GN: Not at present, but we would entertain an ISP option down the road. It seems to be the most logical extension for the present package of services offered.

EDS: Are you considering further expansion into European countries? What are your next acquisition target markets for 2004 and beyond?

GN: We are looking at the potential of establishing a network modeled on Swiftnet, Ltd., our main subsidiary, in another European country or purchasing another company like Swiftnet for solid expansion into the Western European corridor. We would prefer and find it a more sound business venture to look for an established company with strong existing marketing capabilities, one where we could combine that with our strength of telco equipment and technical know-how.

EDS: Any thoughts regarding like expansion into the ever-growing Chinese, SE Asian markets?

GN: Management does like the thought of expansion like that but, unfortunately, the country (Mainland China) is still very heavily regulated. There's essentially one large monopoly controlling the entire sector. Many of the Chinese businesses are still owned by the government, especially the utilities, which are the largest of the markets.

EDS: If the Country opened up in that respect, would you venture in?

GN: We would certainly give it serious consideration. But it would be more likely, in my opinion, prefaced by a larger company, say from the US, first going in and constructing a larger and farther-reaching infrastructure. Only then would I realistically see another country's telco service being introduced, but not for another 5 - 10 years. At that, it would probably be a wireless infrastructure as every indication is that this market is the most likely to grow the quickest. But, yes, Xfone would take a serious look and, if after due diligence dictates that it would be a profitable venture, we would take it to our shareholders.

EDS: As there is further business development in the Euro market, would you consider it advantageous to obtain a Euro listing, perhaps on the AIM?

No, not at this time. Not to say that we do not welcome global investment, indeed we do, but we'll be concentrating solely on the public US market listing.

EDS: Perhaps a more senior US listing?

GN: We are most intent on working on either a NASDAQ smallcap or AMEX listing in the future. It's of great importance to us and we feel it's quite representational of the steady growth of our company. I can tell you that we are not far at all from meeting the requirements to obtain a NADSAQ listing. We very much look forward to the level of institutional involvement such a listing could provide for.

EDS: Let's discuss Xfone's share structure and fundamentals.

Shares Outstanding: 5,101,154
Float: Approximately 10%/510,000
Percentage held by Insiders and 10%+ owners? 90%

EDS:Interest from institutional players in the US or Europe?

GN: No, not at this time. As mentioned, we're definitely looking to further pursue this as the company strengthens as per NASDAQ filing and fulfilling all qualifications.

EDS: Any long-term debt load?

GN: No long-term debt at all; only typical current liabilities, meaning monies owed to suppliers.

EDS: How do you plan on financing future acquisitions?

GN: As our profitability has solidified and remained consistent, we've built up a capital pool for future acquisitions. If need be, we would look to supplement with stock positions, but's been our continual goal to keep the dilution as low as possible.

We're always on the lookout for companies to acquire and have, as a matter of fact, done due diligence on some, but haven't found anything yet fitting our specifications. But the capital is there when the right purchase for Xfone comes about.

EDS: You've been successful in maintaining earnings from your public onset. To what do you primarily attribute that to?

GN: I attribute it primarily to very high technological efficiencies, which, ultimately, helps us maintain a very low overhead and lower monthly burn rate. This acumen was really present from Xfone's private predecessor, Swiftnet, and has been carried very successfully through to the public entity.

A keen eye regarding teleco affiliations and acquisitions further contributes. The growth of marketshare is, of course a large and important part of the picture as well, but, like the old adage, 'keep the customer happy', goes, so do we do our utmost to offer all the most desirous services under one umbrella. All in all, it's been a winning formula for us as evidenced by long customer stays with us…typically 2–3 years.

EDS: Will you continue to declare dividends—$0.02/share announced December 2002—as long as the Company remains profitable?

GN: That is most assuredly our intent. And the dividends might very well grow in tandem with our bottom line. It's important for us to give back to the shareholder. As it's definite proof that we're performing well, it provides that much more incentive for investment.

EDS: What is your earnings forecast for the next 18 - 24 months? Marketing plans to obtain those goals set forth? Consideration of expansion of retail/business services offered?

GN: By the end of the year, it's our conservative target to be at $10M in revenues, and to keep the same net growth momentum as established the year previous. We see further growth through 2004 and 05. We've always found that direct marketing has been a successful mode of operation for us; we definitely plan to do more of that. Viable, and profitable, acquisitions will remain a focus, but we'll concentrate primarily on bettering our existing subsidiaries. We've always been great advocates of capitalizing on what you know and do best.

That said, we plan on upgrading our regular telephony services as well as expanding the cellular division and the integration between the two. It's also our intent to expand into the US market in the future.

EDS: What's your general outlook for the telecom industry as a whole over the next 3–5 years and Xfone's positioning therein?

GN: It's really back to basics and know-how for teleco companies, both in the US and Euro markets. There's no more reliance on hype or analysts reporting that revenues at any cost is the bigger and better way to go. I believe that we're going thru somewhat of a re-birthing process—true for the entire investment community, really—where solid old fashion rules are the name of the game. The investment landscape is one that's improving, however slightly into a more bullish and confident mood, and telco's will have to reinvent themselves and revise infrastructures that are now far too outlandish and expensive to take advantage of the active investor. We might yet still see some collapses. And if so, Xfone will be positioned with its intact and enviable fundamentals to pick up some of their marketshare!

Jennifer Gardiner, an Investor Relations veteran and a freelance business writer, is presently consulting with Eric, David & Sons, Inc. Working primarily with micro and small cap Companies, she has assembled and actively maintains international relationships in her roles as Marketing/Communications Strategist, and Investor/Public Relations Managerial consultant.

Please view the EDS disclaimer/disclosure on Xfone.

2003 © Eric, David & Sons, Inc. All Rights Reserved.

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