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Peru and China Loom Large in Telecom Firm’s Business Plan

VELATEL GLOBAL COMMUNICATIONS INC.

CEO: George Alvarez.

Revenue: $955,000 in 2010; $658,000 in 2009.

Net loss: $66.6 million in 2010; $56 million in 2009.

No. of local employees: 30.

Headquarters: Carmel Valley.

Year founded: 2008.

Stock symbol and exchange: VELA.PK, Pink Sheets.

Company description: Holding company of global telecom carriers with investments in four entities: Sino Crossings, Golden Bridge Network Communications, Perusat, and Chinacomm Communications.

The Internet is a marvelous thing, but for those in developing nations without access, it has to be frustrating.

San Diego-based VelaTel Global Communications Inc. aims to relieve some of that frustration by building and operating wireless broadband networks in China and Peru and offering services at prices the competition can’t touch.

Ryan Alvarez, vice president of marketing for VelaTel, says despite many inroads by much larger and better heeled telecommunications corporations, there are plenty of opportunities in China, with its 1.35 billion population, a good chunk of whom own wireless devices.

“Our goal isn’t to compete with them,” he said of a handful of U.S. and other international telecoms in China. “The thing we’re doing that’s different from them is we’re going after a market they’re not after,” Alvarez said.

In particular, Alvarez said VelaTel’s target customers occupy the lower and middle economic strata. In the two countries where it now has a presence, the middle class has been growing at exponential rates, he said.

In August, VelaTel rolled out a wireless broadband network called Go Movil in eight cities in Peru.

‘Up and Coming’

“The thing about Peru is that it’s an up and coming economy. Its GDP (gross domestic product) is No. 2 (in South America), right behind Brazil, and they have a new president and administration that are big on helping the middle class,” Alvarez said. “They’re dedicated to improving their middle class by giving them the infrastructure they need to compete.”

As it stands today, only about 3 percent of Peru’s population has access to broadband Internet, but that’s certain to change if prices are made affordable, he said.

While broadband telecom networks in China are far below that of most developed nations, Internet usage is rising and now is about 29 percent. More importantly, the nation has the largest number of cell phone users in the world at 833 million, according to VelaTel securities filings.

The magnitude of the China market is such that even a minimal penetration into it will yield fantastic results, Alvarez said.

“We’re not really competing with China Mobile (the largest telecom carrier in the world) and the rest of the big carriers,” he said. “We can become a very successful and profitable company just from the crumbs that fall from the loaf that is China Mobile.”

Looking at the most recent financial reports on VelaTel could scare all but the most risk-immune investors. For the first six months of 2011, the company reported a net loss of $10.7 million on revenue of nearly $373,000. That compared with a net loss of $37.8 million on revenue of about $459,000 for the first six months of 2010. Since its inception to June 30, the company racked up a net loss of $242.4 million, according to its quarterly securities filing.

Those numbers didn’t fend off several investors including the Isaac Group, an Ottawa, Ontario private equity firm that has pumped more than $24 million into the business starting in 2010, said CEO Tony Isaac.

“The broadband business is a good space to be in,” Isaac said. “We like the space and we like the business model and we like the booming economies in Asia and South America.”

Tobin Smith, president of NBT Group in Bethesda, Md., an equity research firm that VelaTel hired, said the company is on the cusp of making it big.

“They’re a pure play, green field business that’s providing the last mile of connectivity,” he said about its Peru project. “They’re bringing mass market, affordable 4G services at 50 percent lower cost, 200 percent higher speeds, and oh, by the way, they’re not the legacy carriers who have a terrible reputation among most of the people down there.”

Smith, who has personally invested $1.5 million in VelaTel stock, said consumers will soon realize the value of the service in comparison to what they get from current providers, particularly when they experience the faster downloading speeds.

Ronald Gruia, an analyst with Frost and Sullivan, a research firm based in San Antonio, said there’s a growing appetite for faster broadband in developing nations such as Peru. The incumbent carriers there, including Telefonica and América Móvil, are still offering 3G services.

Perhaps its biggest coup and one that is allowing it to deploy its networks so quickly is a joint venture with ZTE Corp., one of the world’s largest manufacturers of telecom infrastructure equipment. ZTE is supplying VelaTel with the equipment it needs to build networks in both China and Peru.

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