MagicJack CEO Has Work Cut Out With Bear Bets at Record

MagicJack VocalTec Ltd. Chief Executive Officer Gerald Vento still needs to convince investors that the Israeli technology company is more than just a short-term trade.

The voice-over-Internet technology company fell 20 percent in the past month while short sellers pushed bets on declines to a record 19 percent of shares outstanding on May 1, up from 10 percent at the end of March. The change in sentiment is a reversal from the first three months of the year when MagicJack rallied 78 percent for the biggest advance on the Bloomberg index of the largest New York-traded Israeli companies.

Vento, whose 2014 sales outlook helped fuel the stock’s first-quarter gains, is revamping the company’s mobile application as he tries to benefit from the same business model of free communication services offered by WhatsApp Inc., which was acquired by Facebook Inc. for $19 billion. The CEO, who took over in January of last year, must make more progress on his shift to mobile applications in order to lure long-term investors, said Michael Corbett of Perritt Capital.

“It’s changing in the right direction, but there are too many other moving parts,” Corbett, who oversees $750 million as chief investment officer at Perritt, said by phone from Chicago on April 30. He sold his MagicJack shares at $22 about a month ago after buying them at $11 in December. “There are people shorting, not thinking it’s real. That’s why we couldn’t get ourselves to become long-term investors in the stock.”

Annual Fees

MagicJack, which has headquarters in Netanya, Israel and West Palm Beach, Florida, markets itself as a cheap alternative to landline and mobile phone plans, charging an annual fee of $29.95 to make calls with the device to the U.S. and Canada. The company is betting it can boost sales by attracting more paying subscribers to the MagicJack device through the mobile application, Vento said during a March 12 conference call with investors.

The shares surged 20 percent, the most since 2010, on March 13, a day after the company said sales would grow 14 percent to as much as $163 million this year, compared with the average analyst estimate at the time of $148 million. MagicJack will report first-quarter earnings May 12.

Israel’s benchmark TA-25 index declined 0.4 percent in Tel Aviv today.

Short Interest

The company’s performance in the second half of this year will help sway investors, according to Chief Operating Officer Timothy McDonald.

“Right now MagicJack is focused on execution, and we believe that is what the market will reward,” McDonald wrote in an e-mailed response to questions about the stock performance and short sales. “We are broadening MagicJack’s appeal by simplifying our offer and communicating our compelling value proposition. This will translate into unit sales and revenue growth, numbers that will speak for themselves.”

Short interest, or shares borrowed by investors to bet that the stock will decline, soared in April to an all-time high of 3.4 million shares from less than 2 million in March, according to data compiled by Bloomberg and Markit, a London-based provider of financial information.

While the stock was the worst performer among the most-traded Israeli stocks in the U.S. in April, it is still up 52 percent this year, buoyed in part by hedge fund manager Whitney Tilson, who said in a Feb. 7 note to clients that “the sky is the limit” for the company and the stock. Tilson said he’s bullish on MagicJack because of the “incredible” cost advantage of the Internet voice calling service it offers, rather than the company’s ambitions in the mobile application space.

‘Quite Vocal’

“I don’t think home-phone lines are a growth market, people are cutting the cord, but this company has 3.3 million subscribers and they should, given what they’re offering, have at least 10 times that number,” Tilson said in a May 1 telephone interview from New York. “The people who are bearish on the stock have been quite vocal on the message boards, and I think that’s contributed to making some long investors nervous.”

MagicJack is still the best performer on the Bloomberg Israel-US Equity index this year. The index declined 4.3 percent in April, its worst month since May 2012.

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