IDT Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: IDT Corporation (IDT)

IDT (NYSE:IDT)

Q2 2013 Earnings Call

March 07, 2013 6:00 pm ET

Executives

Samuel Jonas - Chief Operating Officer

Marcelo Fischer - Senior Vice President of Finance

Analysts

Ty Carmichael

Operator

Good day, and welcome to the IDT Corporation Second Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions]

In today's presentation, IDT's Chief Operating Officer, Samuel Jonas, will discuss IDT's financial and operational results for the 3 months ended January 31, 2013. Any forward-looking statements made during this conference call, either in the prepared remarks or in the Q&A session whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those which the company anticipates. These risks and uncertainties include but are not limited to specific risks and uncertainties discussed in the reports that IDT files periodically with the SEC. IDT assumes no obligation either to update any forward-looking statements they may have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast.

In their presentation or the Q&A, IDT's management may make reference to the non-GAAP measures adjusted EBITDA, non-GAAP net income and non-GAAP EPS. A schedule provided in the earnings release reconciles adjusted EBITDA and non-GAAP net income and non-GAAP EPS to the nearest corresponding GAAP measures. Please note that the IDT earnings release is available on the Investor Relations page of the IDT Corporation website, www.idt.net. The earnings release has also been filed on a Form 8-K with the SEC. Finally, please note this event is being recorded.

And I'd now like to turn the call over to IDT's Chief Operating Officer, Samuel Jonas. Please go ahead.

Samuel Jonas

Thank you all for joining the call and for your interest in IDT. For the second quarter of fiscal 2013, we again delivered solid results from both our telecom operations and our earlier stage businesses. Our performance continued to be in line with or slightly better than our high-level guidance. Telecom's top line growth was again quite good. We also experienced revenue and gross profit growth in our All Other segment, attributable primarily to Zedge and Fabrix, which benefited in part from seasonal and other timing-related factors.

On a consolidated basis, revenue increased to $411.7 million from $365.4 million in the year-ago quarter. This is the 12th consecutive quarter of year-over-year increases. Gross profit for the quarter was $67.2 million compared to $59.1 million in the year-ago quarter. Gross margin increased slightly to 16.3% compared to 16.2% in the year-ago quarter. SG&A expense was $56.4 million compared to $51.6 million in the year-ago quarter. Corporate G&A rose to 4 -- $4.4 million from $3.2 million in the year-ago quarter, mainly as a result of $945,000 donation made to the IDT Charitable Foundation and the increase in noncash compensation. Research and development expense incurred wholly by Fabrix was $1.8 million compared to $1.1 million in the second quarter of fiscal 2011. Adjusted EBITDA increased to $9 million from $6.4 million in the second quarter of fiscal 2012. Depreciation and amortization expense was $3.9 million compared to $4.2 million in the year-ago quarter. The decrease was primarily the result of lower investments in Telecom infrastructure in recent years and the impact of some of our older Telecom assets becoming fully depreciated. Income from operations grew to $5.3 million from $4 million in the year-ago quarter, a $1.3 million increase. The year-ago quarter included $1.9 million in gains and a settlement with a former cable telephony customer.

Now I would like to review with you the performance of our specific reporting segments, starting with results from Telecom Platform Services segment or TPS, which generated 98% of IDT's revenue in the second quarter. TPS' revenue increased to $402.8 million from $357.6 million in the second quarter of fiscal 2012. Within TPS, our 3 largest business categories, wholesale termination, Retail Communications and payment services each achieved year-over-year revenue growth rates of 5%, 21% and 28%, respectively. Our Boss Revolution pin-less calling and IMTU products are again the key growth drivers and their expansion in the U.S. more than compensated for declines in revenue in traditional prepaid calling cards in both the U.S. and in Europe.

TPS' gross margin was unchanged at 15.1%. TPS' gross profit increased 12.3% to $60.6 million year-over-year from $54 million. Within Retail Communications, improving gross profits generated by Boss Revolution pin-less calling service more than offset declines in gross profit from the sales of traditional prepaid calling cards. TPS' SG&A expense, including noncash compensation, is $47.3 million compared to $45.6 million in the year-ago quarter. The employee compensation cost, legal expenses and credit card processing fees all increased. The SG&A, as a whole, was below what we had anticipated. We expect the SG&A expense will likely increase at a faster rate for the remainder of the year as we accelerate execution in several product development initiatives and enhancements. And this may cause adjusted EBITDA and income from operations to be lower throughout the second half of the year as compared to the first half.

One likely driver of the increase in the coming quarters will be the rollout in the U.S. of some of our new payment products in our Boss Revolution platforms such as domestic bill payment and international money transfer services. Over the past year we have applied for money licenses in all U.S. jurisdictions where they are required. And so far we have received licenses from 22 states. We expect to begin the rollout on a very limited basis in some of these states in the third quarter and ramp up the pace of operations as conditions warrant thereafter. We also plan to continue adding additional payment services for the Boss Revolution platform and marketing those capabilities.

In tandem with these efforts on the product side, we continue to expand our distribution footprint here in the U.S. by growing our internal sales force. This has proven to be a successful strategy but a costly one.

TPS' adjusted EBITDA in the second quarter of 2013 was $13.3 million compared to $8.4 million in the year-ago quarter. TPS' depreciation and amortization expense continued to decline falling to $3.2 million compared to $3.6 million in the year-ago quarter, primarily as a result of lower levels of CapEx that IDT Telecom in recent years and more legacy equipment becoming fully depreciated. TPS' income from operations was $10.1 million, a strong increase from $6.5 million in the year-ago quarter. Income from operations in last year's second quarter benefited from a $1.9 million gain on the cable telephony settlement I mentioned earlier, thus making the apples-to-apples comparison with growth income from operations even more significant.

Our All Other businesses reported loss from operations of $800,000 compared to a loss from operations of $300,000 in the year-ago quarter. Our expenditures at our IT holding company, ICTI, and our real estate holdings caused the year-over-year increase, but we expect the bottom line to improve significantly during the remainder of the fiscal year.

Within the All Other, Fabrix and Zedge are performing very well. Their revenues increased by 177% and 63%, respectively, year-over-year. They both have very exciting upside. Zedge came out with iOS app this quarter and already has over 1.5 million downloads. The Zedge team will be adding ringtones on iOS in the third quarter which should significantly boost its user base. Zedge's game channel continues to propel Android app to new heights. It's currently in the top 10 of the most downloaded free apps on Google Play and revenue from games has just started.

Net income attributable to IDT in the second quarter was $3 million compared to $2.7 million in the second quarter of last year. However, the position for income taxes in the second quarter of '13 was $3.1 million compared to a benefit from taxes of $0.7 million in the year-ago quarter.

I should make it clear that this provision does not impact our cash position and we'll continue to use our NOLs to offset our federal tax obligations. As of January 31 of this year, the company's NOL totaled at least $173 million.

Non-GAAP net income was $9 million in the second quarter of fiscal 2013 compared to $6.2 million in the year-ago quarter. Diluted non-GAAP EPS was $0.41 compared to $0.29 in the year-ago quarter. For those of you who follow us closely or read the full description and reconciliations in the earnings release, you'll know that we omit depreciation and amortization expense, stock based compositions, discontinued operations and other operating gains and losses from our calculation of non-GAAP net income to arrive at non-GAAP earnings.

Now Marcelo, officially serving both as Senior Vice President in Finance and as CFO of IDT telecom, will join me to answer your questions. Thank you. Marcelo? Operator back to you for q&a.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Ty Carmichael of Gothic Capital.

Ty Carmichael

Just a quick question on your cash flows during the quarter. Looks like you generated a $12 million in cash from operations, but your cash balance sequentially went down by about $16 million, from $166 million to $150 million it looks like. And just trying to reconcile the difference there.

Marcelo Fischer

Hi, it's Marcelo, thanks for calling into this call. You're correct, the cash went -- in the balance sheet went down by about $16 million, and most of that is because of the onetime dividend of close to $14 million that we paid during the second quarter, the $0.50 per share that we paid during Q2.

Ty Carmichael

Okay. And cash from operations has been pretty strong during the first 2 quarters of the fiscal year. Do you have any -- can you provide any perspective on what you think the current run rate on an annual basis is, for the cash earning capability of the business?

Marcelo Fischer

Yes. I mean, we are prone to generating roughly about $35 million to $40 million in EBITDA now and let the CapEx. So we are probably of a run rate of about $20 million to $25 million in cash flow generation right now.

Ty Carmichael

Okay. And then last question would be any -- I know in the past you talked a little bit about moving into the transfer payments space. And any updates on the strategy there and how that may play out?

Samuel Jonas

As you heard I guess from the prerecorded remarks, we'll be rolling them out over the next -- I mean, over this quarter, it'll begin.

Ty Carmichael

Okay. More, I guess -- more -- I think in the past, you talked about maybe accelerating the process through. And that -- you were looking at a potential acquisition and then that, for whatever reason that didn't come to fruition. Or -- and now is that -- is the strategy just to build organically, and or is there still a chance to kind of buy your way into that space to accelerate the rollout?

Samuel Jonas

As of right now, the plan is to do it organically. I mean we're not currently looking at any acquisitions. That doesn't mean that if a good opportunity came our way we wouldn't take it.

Operator

[Operator Instructions] Having no further questions this concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.

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