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IDT Corporation (NYSE:IDT)

F2Q09 (Qtr End 1/31/09) Earnings Call

March 16, 2009 05:00 PM ET

Executives

James A. Courter - Chief Executive Officer and Vice Chairman

Bill Pereira - Chief Financial Officer and Treasurer

Operator

Greetings and welcome to the IDT Corporation Second Quarter Fiscal 2009 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Jim Courter, Chief Executive Officer and Vice Chairman for IDT Corporation. Thank you. You may begin.

James A. Courter

Thank you very much and good afternoon. I am recording this live. I didn't pre-record. I think it somehow goes better that way. I'm here with Bill Pereira, IDT's new Chief Financial Officer, to report to you on IDT's performance during the second quarter of our 2009 fiscal year, the three months ending January 31, 2009.

As this is Bill's first call as CFO, I want to welcome him and thank him for the extraordinary service he's provided IDT and the positions he's had previously and for taking on the financial helm at this time. Bill has impressed us all with his dedication, his hard work and ability to handle numerous complicated matters at once. We're very lucky to have Bill.

Bill thank you very much for joining us.

Before we begin, please recall that any forward-looking statements we may make during the course of this call, either in our prepared remarks or in the Q&A period that follows, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those which we anticipate.

These risks and uncertainties include and are not limited to, specific risks and uncertainties discussed in the reports that we file periodically with the SEC. We assume no obligation to update any forward-looking statements that we have made or may make, or to update you on factors that may cause actual results to differ materially from those that we forecast.

During the course of our discussion today, in our prepared remarks and possibly the Q&A period which follows, we will make reference to adjusted EBITDA. As used throughout, adjusted EBITDA is a non-GAAP measure representing operating income exclusive of depreciation and amortization and restructuring and impairment charges. It is one of the several key metrics we use to evaluate the core performance of our businesses. Please refer to the last page of our earnings release for a scheduled, reconciling adjusted EBITDA to net loss, which is of course a GAAP measure.

This release including this schedule, are also available through the IDT corporate Investor Relations page on our website at www.idt.net.

Now let's get started.

I'll begin by addressing some key company-wide issues and discussing some recent developments as well. Bill will address additional shareholder concerns and discuss each of our businesses in greater detail. Then, four of our colleagues will join us to take your questions; Liore Alroy, CEO of IDT Telecom and Chair of our Executive Committee; Marcelo Fischer, the Chief Financial Officer of IDT Telecom; Claude Pupkin, CEO of our Shale subsidiary AMSO; and Jeff Blackwater, (ph) CEO of our ESKO business IDT Energy.

You may remember that last June in the call with shareholders, our Chairman Howard Jonas forecast that the company would achieve positive cash flow from operations during the second quarter of fiscal 2009. You may also recall that in recent calls, I've discussed our ongoing restructuring efforts. In particular, the goals we set out for ourselves in turning the company around and increasing value for our shareholders.

Since our last call, we have continued our work on this restructuring program. We have achieved much and has even accelerated some of the donors (ph). I want to begin by giving you a brief look at where stand on each of the four objectives I have set forth, in fact, I think during the last three calls.

Number one; reducing corporate overhead. Number two; shedding non-core businesses. Three; streamlining our core businesses and four; energizing some key new ventures with either cash or partners.

First, we've greatly reduced our corporate overhead thanks, a large part to the energetic leadership of Bill Pereira.

Corporate SG&A costs in Q2 were 63% lower than a year ago, down from $16.5 million to $6 million. They were also lower sequentially by approximately $5 million.

SG&A spending reductions during the quarter benefited from several one-time events and other factors that will perhaps be replicated going forward.

However, we are still forecasting a quarterly run rate below $8.5 million, for the remainder of this fiscal year.

As part of the continuing effort to right size our overhead, we will leave our current Headquarters building at 520 Broad Street in Newark this spring and move to leased space very nearby.

When we purchased this building, we did so, because ownership afforded several advantages including better cash flow compared to the terms of the prior lease. Today, we use much less of the building than before. Approximately 75 to perhaps the 100 square feet of the total of 485,000 square feet, and been unsuccessful in our efforts sublease the vacant space.

We've also been saddled with higher energy, maintenance and other costs associated with operating this building to the point where we predict that moving down the street will provide significant future savings.

Second; we have shed non-core ventures that focus on our core operating businesses. As we discussed in our last call, we've transferred to close businesses such as Hopstop (ph), Traffic Pull, Local Pull, Depot USA, ICE, the call centre that we had in Israel and Puerto Rico a long time ago the call centre in Newark, IDT Jets, Oasis Insurance, OCF and quick to talk (ph).

In February this year we exit in addition the Debt Portfolio Management business that fairly nearly all the debt portfolio held by IDT Carmel were $18 million while taking a $35.3 million loss for discontinued operations during the quarter.

In addition to enhancing our liquidity, this deal ends the company's exposure to further write-downs of debt portfolio assets as a result of the economic downturn. We also intend to exit the related debt collection business during the current quarter so that management can focus on our profitable core telecommunication and energy businesses.

Our third objective was to streamline our core businesses and make them more profitable. One year ago, our two core businesses Telecom and Energy, through off $8.4 million in adjusted EBITDA during the second quarter. In the first quarter of fiscal 2009, they generated $17.8 million in adjusted EBITDA. Now, in this quarter, the second quarter, they have produced $31.3 million in adjusted EBITDA.

Clearly, we are moving in the right direction. However for reasons that Bill will discuss in his remarks, the performance of this quarter may not be indicative of the results in future quarters.

Finally, our fourth objective was to male strategic investments in the limited number of ventures with extraordinary growth potential. In this regard, IDT led by Claude Pupkin, will assume join us on the call. And IDT closed on the sale of a 50% stake in our American Oil Shale Subsidiary, AMSO to Total, the fifth largest integrated oil and gas company in the world.

This in my mind validates to a degree our involvement in the Oil Shale business. Under the terms of the sale, Total will provide majority of the funding during the research, development and demonstration or the RD&D phase of the project, as well as providing technical assistance throughout the life of the project as we go forward.

Total will also manage operations once we begin commercial production, which obviously is a long way off. Although this remains a highly speculative project because of the significant technical, environmental and regulatory hurdles involved, not to mention the volatility of crude oil pricing in the global market, Total's participation substantially improves the project's long-term outline.

They have world-class technical expertise and unconventional (ph) fuels production that will be invaluable as we work to bring this project to fruition. We are very pleased to partner with them for sure.

In addition, we continued to invest modestly in Zedge, our mobile content venture project and Fabrics, a video content and storage platform.

As a result of the progress we've made in each of these four areas of our strategic plan, the company generated positive EBITDA -- positive adjusted EBITDA of $21.2 million in the second quarter and if you back out the $15 million we paid to the IRS during this quarter, we were operationally cash flow positive.

Restructuring and impairment cost totaled $16.8 million, and depreciation and amortization costs were $13.1 million. So, that we reported an $8.8 million operating loss. That compares favorably with the same period a year ago, when we reported a $21.6 million adjusted EBITDA loss and a $40.7 operating loss. However, you should note that the goodwill impairment on the second quarter was based on preliminary information and is subject to adjustments. We may record additional goodwill impairments which could be material.

Before Bill begins his analyses of just how the company generated those numbers, I want to briefly discuss two additional matters that shareholders frequently bring up. As we've discussed previously, IDT like a growing number of public companies, faces delisting from the New York Stock Exchange. Our stock price and market capitalization do not retain the Exchange's minimum price and market capitalization criteria.

During Q1 2009, we submitted a plan to the Exchange to meet those requirements. The plan, as was accepted. Pursuant to that plan and consistent with the guidance received from the New York Stock Exchange, we instituted a one-for-three reverse stock split on February 24 to help us meet the minimum share price standard.

Our listing on the New York Stock Exchange has in our minds, very real commercial value and we are therefore committed to taking reasonable steps to maintain it. Whatever the short-term reaction of the market, in long-term investors will value IDT based on our financial fundamentals and the outlook for our businesses. If we continue to make good progress on our turnaround plan, the company has an opportunity to both meet the expectation of shareholders for a reasonable return on the investment and retain our listing on the New York Exchange.

Finally, let me update you on our stock buyback program authorized some time ago by the Board of Directors. During the second quarter, IDT purchased an aggregate of 900,000 shares. That number has been adjusted to reflect reverse split of both class B and common stock for $2.2 million. So far during the current quarter, we bought an additional million shares for approximately $1 million.

As I said before, we will continue to buy back stock when we can do so consistent with our need for working capital.

In summary, we continue to execute on our turnaround plan and our meeting or exceeding the objectives we've set forth for ourselves. We also continue to make steady improvement in adjusted EBITDA terms, even as the bottom line and our balance sheet are adversely impacted by the broader economic downturn. Much of the credit for our progress is due to our employees, who've been doing an outstanding job under very difficult circumstances.

I want to thank those employees that are listening to this call. Let them know how much Howard and I appreciate their dedication and hard work.

Now, I'd like to turn the over to Bill Pereira for his first quarterly earnings call. Bill by the way, prerecorded his remarks this morning. Here they are.

Bill Pereira

Thank you, Jim. I would like to begin by thanking our shareholders for participating on the call. We appreciate your investment and interest in IDT and we value the opportunity to hear your views and comments. Please do not hesitate to comment or ask questions during the Q&A session that follows.

I would also like to thank Howard Jonas, Jim Courter and the IDT Board for their vote of confidence in naming me to this position during these very challenging times and my predecessor, Steve Brown for mentoring me for the past couple of years. I could not have asked for a better teacher. Thank you, Steve.

Before I begin to discuss IDT's financial performance for the quarter, I would like to point out that IDT is exiting the Debt Collection business and therefore IDT Carmel has been reflected in our Q2 financial statements as a discontinued operation. The proceeds from the sale of our debt portfolios of $18 million, which was received in February, is included in assets of discontinued operations in our January 31 balance sheet. Accordingly, all comparative prior periods of IDT Carmel have been restated and are now collapsed and reflected as discontinued operations.

Our quarterly results reflect both the progress towards sustainable profitability we are making internally at IDT, and the impact of the economic turmoil in which we are currently operating.

While adjusted EBITDA, which is one of our key measures of operational performance, continues to show strong improvement, our net income is being negatively impacted by charges related to the cost reduction measures we are implementing and by mostly non-cash write-downs in the value of certain assets which our largely related to the overall decline in asset values being experienced throughout the broader economy.

Adjusted EBITDA, which we define as operating income exclusive of depreciation and amortization and restructuring and impairment charges, was $21.2 million for the quarter. This result continues to build on an improving trend that started a few quarters ago.

Just as a brief reminder, in the second quarter of last fiscal year, adjusted EBITDA was negative $21.6 million. The third quarter, it was negative $38.5 million. We began to see substantial improvement in the fourth quarter of last year when adjusted EBITDA increased to $6.6 million. It remained positive last quarter, the first quarter of this fiscal year, with adjusted EBITDA of 3.7 million and we continued to build upon these recent positive operating results this quarter.

Our adjusted EBITDA of $24.9 million for the first six months for this fiscal year represents an improvement of approximately $65 million over the corresponding six-month period last year. The positive trend in our adjusted EBITDA confirms that IDT is moving in the right direction as our management team is executing on the plan we announced to shareholders namely, to focus on core businesses, cut overhead, eliminate unprofitable business units and streamline operation.

I do want to caution you however, that over several one-time or seasonal events that contributed positively to our adjusted EBITDA this quarter and they are all likely to persist at a same pace in the next few quarters. Most notably, IDT Energy had a superb quarter contributing $16.5 million in adjusted EBITDA.

IDT Energy's gross margin for the quarter up 24.3%, albeit smaller than last quarter, was still double the run-rate margins we would expect this business to sustain.

I will discuss Energy's performance in more detail in just a few minutes.

During Q2, we also benefited from the reversal of some accrued expenses that will no longer be paid due to some of our aggressive cost cutting initiatives implemented during the quarter. In addition, during Q2, we received a City of Newark estate tax refund stemming from a tax appeal stemming back several years. While the benefit of these initiatives will be recurring, the accrual reversals were one-time in nature.

In summary, this was a very strong quarter from an adjusted EBITDA perspective, but it will not be replicated easily. As you are well aware, the United States and the rest of the world is facing a severe financial crisis that is negatively impacting the market valuations of both financial and non financial assets across most industries. IDT has solved (ph) the effects of this situation in global asset values as well and we've had to write down the value of some of our assets, including certain investments within our financial portfolio, real estate, our spectrum licenses and goodwill.

We continue to review and update our goodwill and other long-lived asset valuations and it may have some additional write-downs or reversals in our third quarter as we finalize our analysis.

Overall, IDT's net loss for the quarter was $62 million. This included 13.1 million in depreciation and amortization, 6.2 million in severance and restructuring, 11.5 million in write-downs and investments, a $5.3 million write-off in the carrying value of IDT spectrum licenses, 3.5 million of real state impairments, $1.8 million write-off of goodwill in our IDW business, and a $35.5 million loss in IDT Carmel, mostly to record the loss on the sale of our debt portfolio.

Now, turning to our balance sheet. Our goals for Q2 were to continue to enhance our liquidity, reduce IDT's exposure to investment risk, and reduce our existing tax obligation to the Internal Revenue Service.

Over the past year we have moved to liquidate longer term financial investments such as hedge funds and build our cash position. At the end of Q2, cash and marketable securities, restricted and unrestricted, totaled $192.8 million excluding $2.8 million in cash that's included in assets of discontinued operations.

Investments, both short and long-term, decreased to $17.2 million as we continued to redeem cash from hedge funds and other investments. During the quarter, we also continued to reduce our original $115 million tax obligation to the IRS, resulting from their audit of our fiscal year 2001 through 2004, by making payments totaling in $50 million.

Including the 30 million in payments made prior to Q2 and 20 million paid subsequently to the close of Q2, we have now paid the IRS $100 million. We expect to pay the remaining balance, now approximately $80 million, by mid-June 2009 as per our revised payment schedule with the IRS.

During Q2, we spent $2.2 million in cash to buy back about 900,000 shares of IDT Class B common stock and IDT common stock. So far, fiscal year-to-date we have spent $6.1 million to purchase 3.4 million shares. These numbers are adjusted to reflect the one-for-three reverse split.

Before moving onto the business unit's performance, I just want to point out that excluding the $50 million in payments to IRS during Q2, IDT has positive operating cash flow for the quarter of $7.5 million.

Now I will discuss the performance of our Telecom, Energy and capital provision. But first, let me point out that we have modified the reporting of the business segments within IDT Telecom to better reflect the current operational and managerial organization. There are now only two IDT Telecom business segments. The first; Telecom Platform Services, includes wholesale carrier services as well as all calling card and other in-network services, including prepaid and rechargeable calling cards in the U.S. and overseas, our Net2Phone and Cable Telephony businesses, and other related services.

The second segment, Consumer Phone Services, operates in the U.S. only and includes our bundled unlimited local and long-distance services as well as our long-distance only services.

IDT Telecom had a strong quarter with regard to profitability. Despite carrying fewer minutes and experiencing lower revenue per minute, both compared to the year ago quarter and sequentially, profits grew thanks to Telecom's continued focus on gross margin improvements and cost cutting at the SG&A line.

Within our Telecom Platform Services segment, minutes of use declined 8.8% from 5.8 billion in Q2 2008, to 5.3 billion in Q2 2009. Wholesale carrier minutes declined 6.4%, reflecting a general decline in demand relatively suspect to weakness in the boarder economy, and due to our focus in prioritizing higher growth profit traffic.

Retail minutes of use, consisting mostly of calling card traffic, saw 12.5% year-over-year due to the macroeconomic weakness, competitive pressure, and a gradual market shift towards prepaid wireless products and other technology such VoIP. Average revenue per minute continues to decline year-over-year with a 6.8% decline in our retail calling card business and a 1.9% decline in our wholesale carrier businesses.

The decline in both volume and revenue per minute has lowest the negative impact of the strengthening dollar, because the revenue generated by our Telecom Platform Services segment to decline 12.9% year-over-year to 318.4 million.

Our Consumer Phone Services segment, which remains in full harvest mode, saw revenues decline by 33.1% year-over-year to $14.1 million although customers continued to attract (ph) at expected level.

Direct cost of sales for IDT Telecom was 13.4 % lower than a year ago. We carried fewer minutes at a cheaper variable cost per minute and also reduced connectivity cost by continuing our network migration to an IP-based technology. Gross margin for IDT Telecom fell slightly year-over-year to 21.5% that actually improved from 20.5% last quarter. We reduced total SG&A expenses in IDT Telecom by 29.3 % from Q2 2008 to Q2 2009.

Total SG&A fell $22.2 million to 53.7 million. Costs have been reduced across the board. Head count, employee benefits and bonus programs, facilities and maintenance, advertising and marketing expenses, as well as legal and other professional fees, have all been cut.

For the quarter, IDT Telecom generated $14.8 million in adjusted EBITDA, compared to 6.3 million during the year ago period, and 6.6 million last quarter. The loss from operations for Q2 was $700,000, including $4.7 million in restructuring and impairment costs, and 10.9 million in depreciation and amortization. This compares favorably to a $9.2 million loss for the same period in fiscal 2008 and a $4.1 million loss last quarter.

Now let's talk about IDT Energy. IDT Energy had another extraordinarily strong quarter, driven by continued growth in its customer base, higher consumption per meter, and improved margins as a result of favorable market conditions.

As of January 31, 2009, IDT Energy had grown its subscriber base to approximately 408,000 meters compared to 318,000 meters a year earlier. Revenue for the quarter jumped to $93.9 million, up 44.3% over the same period a year ago. Electricity sales were $40.8 million compared to 29.8 million in Q2 of fiscal 2008, and natural gas sales were $53.1 million compared to 35.2 million a year ago.

Gross margins for the quarter increased to 24.3%, compared to 10.4% in Q2 2008, as the business continues to take advantage of a favorable though likely temporary increased spread between stock market pricing and retail prices.

Total SG&A cost for IDT Energy in Q2 increased by 24.5% over Q2 2008, to $5.8 million. This was driven by increases in third party billing related fees, including the cost of participating in the utilities purchase of receivable programs and by our customer acquisition costs.

As a percentage of revenues, SG&A expenses declined from 7.2% in Q2 2008, to 6.2% in Q2 2009. IDT Energy generated $16.5 million in adjusted EBITDA for the quarter and $16.4 million in income from operations.

At IDT Capital during Q2, we experienced declining revenue but a strong improvement in the level of its operating loss as compared to prior period as a result of our actions to shutdown or dissect non-core unprofitable businesses. IDT Capital's revenues declined 14.1% in Q2 versus the same period in fiscal 2008, to $10.9 million. However, adjusted EBITDA loss for the quarter was $4.1 million, a 69.6% reduction from the same period a year ago when we reported a $13.5 million loss.

The biggest impact on IDT Capital's adjusted EBITDA came from our Alternative Energy group, which is comprised of our Oil Shale businesses, AMSO in Colorado and IEI in Israel, which incurred research and development expenses of $4 million during the quarter. Although our recently announced new partner, Total will begin to pay a majority of AMSO's operational costs going forward, we do expect that cost will increase throughout fiscal 2009 and 2010 both for AMSO and IEI.

At the corporate level, we have been relentlessly focused on reducing our overhead and those efforts are clearly paying dividends. Our year-to-date SG&A expenses are $17.1 million, is less than half of what we incurred during the same six-month period last year and we believe SG&A at corporate will continue to decline further throughout the year, albeit at a slower pace.

In summary, I believe we have taken great strides over the past six to nine months to turn our company's profitability around despite the economic circumstances under which the world is operating today. And I look forward to both the challenges and opportunities that lie ahead for us.

This concludes my prepared remarks. Jim and I now welcome our colleagues Liore Alroy, Claude Pupkin and Marcelo Fischer to take your questions. Thank you.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions). I am sorry no question, thank you. I'd like to turn the call back over to management.

James Courter

Well, thank you very much for listening those who are still on and we look forward to talking to you in the third quarter.

Thank you very much, have a good evening.

Operator

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.

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