Bill Ulrey – Investor Relations Officer
Howard Jonas – Chief Executive Officer, Chairman of the Board
Bill Pereira - Chief Financial Officer, Treasurer
IDT Corporation (IDT) F1Q10 Earnings Call December 10, 2009 5:30 PM ET
Welcome to IDT's Corporations first quarter fiscal 2010 earnings webcast. This is Bill Ulrey, Investor Relations Officer. IDT’s Chairman and Chief Executive Officer, Howard Jonas and Chief Financial Officer, Bill Pereira will be reporting to you shortly on IDT’s financial and operational results for the three months ended October 31, 2009.
This quarter we are following the same announcement format we have used in prior quarters. Our earnings release is available on the Investor Relations page of IDT Corporation's website at www.IDT.net. We have also filed the release on Form 8-K with the SEC.
These remarks are pre-recorded. If you have any questions after listening to them and reading the company’s earnings release, please email them to us at the following address: firstname.lastname@example.org. We will accept questions through the close of business tomorrow, December 11th. Please include your name and firm name, if applicable, in your email. If we can constructively answer to your question we will post your question, along with your name and your firm's name and our answer, on the Investor Relations page of IDT's website as early as next Wednesday, December 16th after market close or soon thereafter.
We will file a Form 8-K with the SEC containing the questions and the answers. If you have any questions or suggestions regarding our Q&A process please e-mail us at the exact same address.
Any forward-looking statements we make during this webcast or the written Q&A that are 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, but 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 the factors that may cause actual results to differ materially from those that we forecast.
In the prepared remarks you will hear today and also possibly in our written questions thereafter we will make reference to adjusted EBITDA, earnings before income taxes, depreciation and amortization. Adjusted EBITDA for all periods discussed during our remarks is a non-GAAP measure representing operating income exclusive of depreciation and amortization, restructuring and impairment charges and gains or losses as a result of business or asset sales.
Adjusted EBITDA is one of several key financial metrics management uses to evaluate the company’s and the different segment’s operating performances. The schedule provided in the earnings release reconciles adjusted EBITDA to the nearest corresponding GAAP measure, loss from operations for each of our segments and to both loss from operations and net loss for the company as a whole.
Now to begin the discussion of our operating results here is IDT Corporation’s Chairman and Chief Executive Officer, Howard Jonas.
Thanks Bill. Good afternoon. This is Howard Jonas. Let me begin while welcoming my fellow shareholders and IDT employees. Thank you for listening in. You are used to listening to James Courter present as CEO on these calls. I cannot hope to match Jim’s eloquence but I hope that my own confidence in IDT will keep your interest. Jim has been invaluable to IDT and we look forward to reaping the benefits of his advice and service as a Vice Chairman for years to come.
With our results this quarter IDT has achieved six consecutive quarters of positive EBITDA. Adjusted EBIDTA is one metric we use to provide a meaningful measure and basis of comparison of core operating results. During these six quarters we generated $65 million in adjusted EBITDA despite the worst global economic environment in a generation. That is not bad especially when you consider during the previous 18 months our adjusted EBITDA loss totaled $181 million. That is nearly one quarter-billion dollars net improvement.
A big part of the turnaround was achieved by divesting non-core businesses and aggressively cutting costs both in terms of corporate overhead and streamlining our core businesses. None of these moves have been easy. I have been with IDT since the beginning and some of the businesses cut were very dear to me and the people we had to let go were good friends but we did what was needed to provide a platform for future growth. So we have come a long way. That doesn’t mean much if we stop at cost cutting. So now we are all focused on growth strategies and our core businesses as well as in a few select projects where we are investing very judiciously.
At IDT Telecom we began leveraging a recent consolidation of our UTA business subsidiary by rolling out and promoting a new very competitive national brand of calling cards in the fourth quarter of last year. As a result, in the first quarter the rate of decline in US prepaid calling cards slowed and we are looking to turn this around and produce revenue growth in this line of business although probably at lower margins initially.
Overseas our retail business in Asia and Europe has had double digit sales increases year-over-year. Keep in mind that as our retail prepaid businesses generate more mass our wholesale carrier business can leverage their traffic to obtain better rates and margins. We have a healthy growing retail business and in order to have a carrier business and vice versa. We are also leveraging our UTA distribution network to resell international mobile top-up product line. This service allows our customers in the United States to buy minutes and transfer them to the accounts of their friends and family with participating wireless carriers overseas. We weren’t really even in this business a year ago but it really took off in the last half of 2009. We expect great growth for this business in the year ahead.
At our headquarters, I am the in-house optimist and I am optimistic that these and other growth initiatives will gain momentum this fiscal year significantly improving our top line outlook for IDT Telecom’s global retail businesses while aiding our carrier business as well.
Now let’s talk about our Genie Energy division. We formed Genie Energy to put our energy business and growth initiatives under a common managerial structure and provide focus and coordination. Within Genie, our [inaudible] IDT strategy has had a solid performance for several quarters. We have maintained margins well above expected levels and have been successful in times of rising, declining and stable prices.
We have recently refocused sales and marketing on bringing in higher value customers and our continued growth will depend on how that program develops. We are pleased with IDT’s energy performance and are expanding our model to more space. We are monitoring de-regulation developments in a number of states and as the regulatory parameters are right for us and if the utilities take a supportive approach then we will start up operations elsewhere. If we do enter new markets, we will invest to build our customer base much as we have already but we already have a proven model and seasoned management in place to optimize our use of capital and maximize our return on that investment.
Our alternative energy segment, AMSO’s R&D operations in Colorado, continue according to plan. We are currently designing our pilot plan and plan to begin our pilot heating test late in calendar 2010 or early 2011. Upon successful completion of the pilot test we intend to work to design and implement a larger demonstration to evaluate the commercial viability of our in-situ approach.
In Israel our alternative energy subsidiary, IEI, has begun drilling and other work characterized by the oil shale resource in the license area. The early results are promising and if all continues to go well they will begin to design, build and eventually operate a pilot stage to test the feasibility of and prepare the company for commercialization. However, the scope of the project and its technical and capital requirements are very high. That is why we will recruit a well capitalized partner just as we did with Total in Colorado.
Taken together, these two shale initiatives are tremendously exciting especially given the advances the industry is making to develop environmentally friendly shale oil extraction technologies. The magnitude of importance of the oil shale resource is such that it can favorably shape the geopolitical landscape of the United States and its allies around the world, while at the same time becoming a powerful engine for economic growth and job creation here at home.
In addition to shale oil we have continued to invest modestly in a very few targeted initiatives with high growth potential. Zedge, our destination for mobile content continues to exceed expectations. The Zedge website received approximately 23 million unique visitors in the first quarter of 2010 compared to approximately 15 million in the year-ago quarter. Zedge mobile enjoyed phenomenal growth year-over-year.
In the first quarter 2009 had 4 million unique visitors. A year later, 25 million unique visitors came to the site. There is of course a fundamental shift underway in the marketplace for mobile content. That is one reason Google paid $750 million for mobile advertising provided by [ads] last month. So I am very pleased that Zedge Mobile has developed such a large following so quickly in this corner of the market.
We are working to ensure that it remains one of the key mobile content destinations. The Zedge community growth combined with the slow rebound in the global advertising market should help Zedge Mobile to become financially self-sustaining. If Zedge’s community continues to grow at its current pace, Zedge will become an increasingly valuable tool to reach young people around the world.
Finally, we continue to invest modestly in [Fabric TV] in which we are a majority shareholder. Fabric has developed a highly innovative video content delivery and storage platform enabling content operators, telecommunication providers and ISPs to provide television applications including next generation video on demand and remote video storage capabilities. [Fabric] software is being OEM’d and is currently being deployed across several cable systems. We believe that [Fabric] has great potential to be a winner in a new world of content delivery and I expect exciting developments in the quarters to come.
We are aggressively pursuing growth strategies in our core businesses and we have potential game changes in the oil shale, Zedge and [inaudible]. Overall, I am extremely happy with our recent progress and where IDT is headed. Before turning the call over to Bill Pereira I want to take a moment to thank all IDT employees who worked so hard to make our progress and turnaround possible and also express my appreciation for our long-term shareholders who have stuck with us while so many others bailed.
I am grateful for your commitment to IDT. Now here is IDT’s Chief Financial Officer, Bill Pereira.
Thank you Howard. Good afternoon everyone. As most of you are aware, by the end of fiscal 2009 we had substantially implemented the company-wide restructuring and streamlining plan which we viewed as essential in providing IDT with a solid foundation for growth. Nevertheless, there have been several developments during and subsequent to the first quarter of 2010 that have allowed us to further sharpen our focus on our core businesses.
Before getting to the quarter’s results I would like to discuss some of these developments. In August 2009 we received $4.4 million in proceeds from the sale of our Palo Alto real estate holdings of which we paid $1.5 million for our non-controlling partner in November and we followed that up in October with the sale of our building in Puerto Rico that previously housed our call center operations.
The Puerto Rico sale netted $800,000 in cash on a total sale price of $7.4 million. These real estate transactions follow the sale of our Jerusalem, Israel building last fiscal year. At this point our remaining real estate holdings consist of our former headquarters building at 520 Broad Street in Newark and two sister properties in New Jersey which house part of our telecom network infrastructure and related employees. The $37 million in notes payable remaining on our balance sheet consist essentially of the mortgages underlying these three remaining properties.
In mid-September we spun off to our shareholders the equity of CTM Media Holdings, Inc. which included the CTM Media Group, IDW Publishing and the WMEP Radio Station in Washington, D.C. The spinoff of CTM Media holdings reduced our total assets by $21.2 million. Included in that total is $9.8 million in cash, $4.1 million in property and equipment net of accumulated appreciation and $3 million in net accounts receivable. In addition the CTM spin off reduced our liability by $5.4 million.
During the quarter we also announced the formation of our Genie Energy Division bringing our energy related businesses under a common organizational umbrella. Within Genie we operate two segments; IDT Energy, our escrow operating in New York State and our alternative energy segment. The latter consists of AMSO which holds our interest in the joint oil shale venture in Colorado with Total, and Israel Energy Initiative (IEI), our alternative energy venture in Israel.
We also began an auction during the quarter to monetize our FCC special license holdings. Although the auction generated no bids, we continue discussions with interested parties.
Now let me turn to the financial results for the first quarter of fiscal 2010. The quarter continued the trend of recent quarters with improved year-over-year results in adjusted EBITDA and operating income while our top line continued to decline. Company-wide revenues for the first quarter declined $76.5 million or 18.9% year-over-year and $15.7 million or 4.6% sequentially. Revenue at IDT Telecom fell to $285.6 million, down 14.9% from the year-ago period and down 6.3% sequentially.
The larger of the two IDT Telecom segments, Telecom Platform Services or TPS, generated $275.2 million in revenues, a 14% decline compared to the first quarter of 2009 and a 6.1% decline sequentially. TPS delivers international long distance telephony services to retail and wholesale customers. Within TPS our largest lines of business are our wholesale carrier service business and our global retail business. This includes our US retail calling card operations as well as our retail operations in Europe, Asia and Japan and Latin America.
Revenues from carrier services declined 10.8% year-over-year and 7.3% sequentially. Minutes of use rose slightly, but revenue per minute declined 11.5% year-over-year as a result of intensified competitive pressures in the wholesale market. Global retail revenue fell by 15% year-over-year and 3% sequentially. Within global retail, revenues from our US calling card operations declined substantially year-over-year but the rate of decline slowed significantly in Q1 2010 compared to the sequential declines we saw in fiscal 2009.
During the fourth quarter of fiscal 2009 we purchased the remaining interest in our UTA distribution subsidiary that we didn’t already own. As a result we are not able to better align our sales and marketing efforts with product development and pricing strategies and we have launched a new brand of prepaid calling cards nationwide to leverage this synergy. We are encouraged by the fact that US calling card minutes of use increased sequentially in response though average revenue per minute and gross margin declined as a result of more aggressive pricing particularly on the new brand.
As Howard mentioned, growth in sales of international mobile top-up’s, IMTU, was very strong. The IMTU business resells units provided by participating overseas mobile operators to customers in the US who can then transfer them directly to the mobile phones of friends and family overseas by the operator. Although we have seen very rapid growth in this business since we launched it in the second quarter of fiscal 2009, it generates significantly lower margins than our traditional calling card product and it is still relatively small but we are excited about the growth potential of this business. Outside the US we continue to see healthy retail minutes and revenue growth in Europe and Asia.
Our other telecom reporting segments, Consumer Phone Services (CTS) provides residential local and long-distance calling services. This business has been in harvest mode since fiscal 2006 and its customer base continues to perform at expected levels. CTS revenues were $10.4 million in the first quarter, down nearly 1/3 from the year-ago level.
Turning now to our newly formed Genie Energy Division, our IDT Energy had another strong performance in the first quarter of 2010 largely due to gross profit per unit levels that we don’t believe are sustainable. Although revenues have run 40% year-over-year to $40.3 million this was mainly due to a decline in both electric and gas prices as consumption remained effectively flat.
IDT Energy’s meters sharp declines year-over-year and sequentially as well however going from 397,000 in Q4 2009 to 372,000 in Q1 2010. We have retooled our sales and marketing program in order to reduce churn, target higher value customers and increase productivity. This effort has significantly reduced churn which declined from 6.1% in Q1 2009 to 2.7% in Q1 2010.
That was not enough to offset the slower pace of growth near acquisition. We expect that the rate of growth acquisition will improve in the second quarter and aided by continued low levels of churn we expect to begin growing our customer base once again during the current fiscal year although at a lower growth rate than we achieved during the first half of fiscal 2009.
Also within Genie Energy, as expected, our alternative energy segment reported no revenue as it is still in the RD&D phase.
Gross margin at IDT fell to 21.1%, down 140 basis points year-over-year and 170 basis points sequentially driven largely by IDT Telecom where the gross margin dropped 220 basis points year-over-year and 320 points sequentially to 18.7%. The investment in our new calling card brand in the US that I mentioned earlier, coupled with aggressive pricing on our European calling cards as well as the mix impact from the growth in our IMTU product and the decline in average revenue per minute in our carrier services business were all factors contributing to the gross margin decline.
Gross margin at IDT Energy jumped 620 basis points year-over-year and 1,100 basis points sequentially to 36.3%. We continue to believe that this level of gross margin is not sustainable on a consistent basis going forward. However, IDT Energy has been successful in maintaining strong margins despite fluctuating market conditions over the past several quarters now.
Company-wide SG&A expense totaled $57.1 million, fully 1/3 lower than the year-ago quarter level of $85.6 million and down by 8.9% sequentially. Corporate SG&A of $5.5 million was half the level of the year-ago period. We have cut costs by reducing personnel as well as legal and professional fees while stock based compensation expense rose somewhat this quarter related to arrangements with James Courter on his retirement as CEO.
SG&A at IDT Telecom was reduced year-over-year by 27.1% to $44.5 million reflecting the same factors I just motioned as well as reduced facilities and equipment and software maintenance costs. SG&A expense at IDT Energy declined to $4.1 million, less than half the level of the year-ago period. The reduction was led by a steep decline in customer acquisition costs and associated compensation as a result of the sales and marketing restructuring begun in the fourth quarter of fiscal 2009. Lower purchase of receivable costs and other fees billed to the incumbent utilities also contributed.
As those of you who have listened to previous calls know, we use adjusted EBITDA as a key metric when evaluating the performance of our businesses in the company as a whole. It is a non-GAAP measure representing income from operations exclusive of depreciation and amortization, restructuring charges and impairments. In the first quarter of fiscal 2010 adjusted EBITDA company-wide was $9.5 million, a healthy increase compared to the $2 million generated in the first quarter a year ago.
The improvement reflects the impact of our corporate restructuring program and particularly reductions in SG&A. But the pace of cost cutting did not keep up with the decline in sequential gross profits at IDT Telecom and adjusted EBITDA fell 28.9% compared to the prior quarter. Adjusted EBITDA at Telecom was $7.5 million, up 8% compared to the first quarter of fiscal 2009. CTS contributed $3.6 million to that total and [CTS] the balance.
IDT Energy generated $10.5 million in adjusted EBITDA, down from the $11.1 million in adjusted EBITDA it generated in the first quarter of fiscal 2009. Depreciation and amortization charges company-wide continue to fall as a result of our recent relatively low levels of CapEx spend. IDT Telecom’s migration of its global network from dedicated capacity TDM service to burstable internet protocol circuits has significantly reduced our CapEx requirement as well as our network operating costs.
Depreciation and amortization declined 27.1% year-over-year to $9.4 million. This reduction contributed to IDT’s ability to achieve positive income from operations of $200,000 in Q1 which compares favorably to the loss from operations of $12.1 million in the year-ago period and the $200,000 operating loss in Q4 2009.
In my fourth quarter 2009 remarks I made note of the fact we had achieved positive income from operations of $1.8 million and noted it as a significantly milestone in our path to bottom line profitability. While that was accurate at the time, two events since the end of the fiscal year have conspired to change this situation.
First, we completed a CTM spin off in the first quarter 2010 so CTM Media Holdings and its subsidiaries were reclassified to discontinued operations for Q1 and all prior periods which reduced Q4 2009 income from operations by $1.3 million. Second, during Q4 2009 we entered into an agreement to sell our European prepaid financial services business, EPP, and as a result we reported EPP in discontinued operations.
We subsequently determined that EPP’s prospective buyer was unlikely to complete the transaction and therefore that EPP no longer met the criteria to be reported as a discontinued operation. The asset, liabilities, results of operations and cash flows of EPP were reclassified to continuing operations this quarter which reduced Q4 2009 income from operations by $700,000.
As a result of these two changes, we had a $200,000 loss from operations last quarter rather than positive income of $1.8 million I reported to you at the time. Still, I am encouraged by the fact we have now operated at breakeven over the past six months as we look to improve from here.
We reported a net loss of $3.5 million in Q1 2010, a substantial improvement from our $37.3 million loss in Q1 2009. Last quarter we reported net income of $7.2 million which included a one-time reversal of a $16 million tax accrual. By the way, I should mention in three accounts for our 50% ownership in the operating company AMSO LLC using the equity method, our share of AMSO LLC’s net loss for the quarter, $400,000 is included in the other expense line and the consolidated statement of operations and does not impact our revenue, expenses, adjusted EBITDA or operating income.
Net loss attributable to IDT per share which was formerly referred to as net loss per minority interest in the first quarter of fiscal 2009 was $0.17 compared to a net loss per share in the first quarter a year ago of $1.53 and net income attributable to IDT per share of $0.35.
Turning briefly to IDT’s cash flow, net cash generated by operating activity turned positive during the quarter and totaled $2.2 million compared to net cash used in operating activities of $52.4 million in the first quarter a year ago and $2.4 million used last quarter. The statement of cash flows also includes negative $9.8 million in cash we consolidated as a result of the CTM Media Holdings spinoff.
Moving on to our balance sheet, as of October 31, 2009, cash, cash equivalents and marketable securities totaled $187 million of which $20.3 million is restricted. As we previously announced, BP Energy became our preferred supplier of electricity and natural gas in New York State during the prior quarter. As a result of that agreement, collateral comprised of $57 million in letters of credit outstanding at the close of our 2009 fiscal year, on July 31st was reduced to just $7 million as of October 31st resulting in a $15 million increase in our liquidity which brings me back where I originally began my remarks.
I believe Q1 continued to solidify our footing and puts us in yet a better position to go after growth in our two main businesses while at the same time bringing us ever closer to our goal of sustained bottom line profitability. This wraps up my discussion of our results for the quarter. Before I leave you I just want to remind anyone who has a question to email it to us at email@example.com by the close of business tomorrow, December 11th. If we can constructively answer your question we will post our response on our website and a form 8-K as early as Wednesday, December 16th, following the market close.
I hope everyone enjoys the holiday season. I thank you for your interest in IDT and wish everyone happiness and prosperity in the year to come.
Thank you. This concludes the IDT Corporations first quarter 2009 earnings results webcast.
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