Bill Ulrey – IR
Howard Jonas – CEO and Chairman
Bill Pereira – CFO and Treasurer
IDT Corporation (IDT) F2Q10 (Qtr End 01/31/10) Earnings Call March 11, 2010 5:30 PM ET
Welcome to IDT Corporation's second quarter of fiscal 2010 earnings webcast. This is Bill Ulrey, IDT’ Investor Relations Officer. IDT’s Chairman and CEO, Howard Jonas and CFO, Bill Pereira will be reporting to you shortly on IDT’s financial and operational results for the three months ended January 31, 2010.
This quarter we are following the same format we 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 a 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 e-mail them to us at the following address: email@example.com. We will accept questions through the close of business tomorrow, March 12th. Please include your name and firm name, if applicable, in your e-mail. If we can constructively answer 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, March 17th, after market close or soon thereafter.
We will also 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 same address.
Throughout this webcast, any forward-looking statements made during this webcast or in the written Q&A, 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, 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 responses to 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 or loss exclusive of depreciation and amortization, and restructuring and impairment charges.
Adjusted EBITDA is one of several key financial metrics management uses to evaluate the company’s and the different segments’ operating performances. The schedule provided in the earnings release reconciles adjusted EBITDA to the nearest corresponding GAAP measure, income from operations, for each of our segments and to both income from operations and to net income for the company as a whole.
Now to begin the discussion of our financial and operating results, here's IDT Corporation's Chairman and Chief Executive Officer, Howard Jonas.
Thank you, Bill. Good afternoon to everyone. I am Howard Jonas, Chairman and CEO of IDT. Let me begin with the black bottom lin. IDT attained profitability this quarter, generating positive income from operations of $7.6 million and net income attributable to IDT of $3.7 million. Compared to a year ago, when our loss from operations was $6.2 million and our net loss was $62 million, it is a dramatic improvement. I want to take a moment here to thank and congratulate all the IDT employees listening. This turnaround was a direct result of your efforts. I very much appreciate your hard work and believe that if we continue to apply ourselves, great things are in store for all of us at IDT.
What is more, we now have positive net income for the first-half of fiscal 2010, and all of us here at IDT are focused in keeping it that way for the remainder of the year and beyond. Bill Pereira is going to get into the details of our results for the quarter, but I want to make two big picture points before turning the call over to him.
The first point is that we have broadened our strategic outlook beyond cost-cutting, and are working on initiatives that will grow our core businesses. At IDT telecom, our minutes of use were up by 13% year-over-year and by 10% compared to a prior quarter, and revenues increased by $14.8 million compared to the first quarter of the fiscal year. That is not only a seasonal improvement. In fact when you compare telecom’s quarterly revenues in fiscal 2009 to the prior quarter, you'll find that revenues did not increase at all. In fact they declined by $27.5 million. So we're generating real revenue growth.
In the United States this expansion is driven by the consolidation of IDT retail with UTA, our distribution company, and has been helped by aggressive pricing of our services. But we have also increased telecom retail revenue in Europe and Asia by double-digit percentages year-over-year. Globally, we will continue growing our retail businesses by improving the scope and reach of our distribution networks and by developing new and innovative products to meet the needs of our customers.
Also within telecom our Fabric [ph] TV initiative is showing real famous. As you may recall, Fabric was developed a highly innovative, proprietary video content delivery and storage platform, enabling cable operators, telecommunication providers and ISPs to provide a wide range of video application, including next generation video on demand and remote storage capabilities.
Fabric has been opened [ph] and deployed across several cable systems. If all continues to go well, Fabric has the potential to realize significant value for IDT, and all of our shareholders and change the entire cable industry. As such, our destination to the discovery of mobile content also continues to grow. In the second quarter, (inaudible), which has been well received and has been attracting a significant user base.
(inaudible) continues to grow its revenues and its monthly user base now up to 20 million continues to expand. With our Genie Energy business, IDT energy, our energy supply company based in New York had another solid quarter with the growth of 26.9 margin. We have cut customer churn in half, and our rate of gross customer acquisitions is picking up. In addition, we are evaluating potential opportunities to expand into other states, while IDT's energy business model and capabilities can be adapted to a deregulated retail energy markets without compromising on our conservative risk policies.
Also within Genie Energy, our alternative energy segment remains a key focus. With oil prices again rising over $80 a barrel, and the United States importing over 8 million barrels of crude oil each and every day, the economic and public policy rationale to developing America’s tremendous shale oil reserve remains compelling.
In Colorado, we are making steady progress designing and constructing our pilot test. We're scheduled to begin the pilot heating test of our in situ approach late in this calendar year or early in 2011. Upon successful completion of that pilot test, we will begin to design and implement a large-scale demonstration to evaluate commercial viability. Our alternative energy subsidiary in Israel, IEI, is charactering the shale oil resource in our license area. The early results have been promising, and if all continues to go well we are preparing to design, build and operate a pilot stage to test the feasibility of and prepare the permitting for commercialization.
All this, all the scientists working on all these initiatives, all the drilling, all this is coming out – is being deducted from the revenues that you see in this quarter, and still we are positive in operating income. So it is really much more positive than it seems, because IDT is not only running its business profitably, it is developing the key initiatives for the cable business, what I believe is going to be the key technology for the oil industry, and also you know a Internet business in the mobile field, which is the fastest growing field that already has 20 million customers, you know on a monthly basis.
So across the entire scope of IDT's core telecommunication and energy businesses, we're leveraging existing strengths and developing new products and services. These growth initiatives provide a healthy mix of short and long term growth opportunities, and we are pursuing them with determination.
The second big picture point I want to impress upon you is that IDT is a very different company than it was a couple of years ago. In fact, we're leaner and more disciplined today than we have ever been. That is why we are profitable. For the first-half of fiscal 2010, corporate SG&A, our best measure of corporate overhead was less than half of the total corporate SG&A for the first half of fiscal 2009.
Companywide we reduced SG&A by over $40 million over the same period, the 26.4% decrease. Our management team is building on the progress we have made in recent quarters by continuing our commitment to lean operations and financial discipline. While we will aggressively pursue the growth opportunities I discussed here, we will do so in a focused measured way that rationally allocates our capital and build shareholder value.
Again, thank you for taking the time to listen in. Now, here is IDT's chief financial officer, Bill Pereira.
Thank you, Howard. Good afternoon everyone. It is my pleasure to be able to discuss our most recent quarterly results with you. During the past two years, we have been showing steady improvements in our operational results as reflected by the rising levels of adjusted EBITDA we generated throughout much of fiscal 2008 and 2009.
We have repeatedly said that once we digest the impact of our restructuring efforts and got past the impact to the economic downturn on asset valuations, these operational improvements would work their way through to our bottom line. With this quarter's results, as Howard pointed out we have finally reached the objective of our turnaround plan, bottom-line profitability.
For the second quarter of our 2010 fiscal year, we're reporting positive income from operations, net income, and cash flow from operating activities. But before I delve into our results for the quarter, I just want to give our investors a quick update on the status of our New York Stock Exchange listing.
Back in September of 2008, the New York Stock Exchange notified IDT that we were not in compliance with the New York Stock Exchange’s global market capitalization listing standard of $100 million. To regain compliance and retain our New York Stock Exchange listing, our market capitalization at the market close on March 30, 2010 and our trailing 30 day market capitalization average, which are the 30 trading days beginning February 17, and ending March 30, must both be over $100 million.
If we aren’t in compliance on March 30th, the NYSE is likely to begin the delisting process. In the event of a delisting from the NYSE, the company will seek to transition IDT's stock listings to an alternative exchange. Currently, IDT meets the initial quantitative listing standards for the NASDAQ global markets and the NYSE MX [ph].
After the market closed yesterday, March 10, our market capital was $105.4 million, and our trailing average going back to February 17 was $105 million. So while we have reason to be optimistic about regaining compliance with the NYSE listing standards on March 30, and remaining on the NYSE, we also have a backup plan if necessary.
Now let us move on to the financial results for the second quarter of fiscal 2010. Company-wide revenues were $362.7 million, a 10.2% decline compared to Q2 2009, but $35.3 million above last quarter. The year-over-year decrease was due primarily to a 35.3% decline at IDT energy resulting from sharply lower energy prices compared to the year ago quarter.
Gas rates declined 26.3% from the comparable year ago period, while electric rates declined 25.7%. Lower consumption as a result of less meter served, and believe it or not with all the snow we have had in North-East warmer weather also contributed to the decline.
As I've mentioned in the past, however, revenues are not a strong performance indicator for the IDT energy business since they are tied so closely to market prices for the commodities, as well as weather related fluctuations and demand. We here at IDT focus much more on gross profit and gross margins as key metrics for assessing performance for this business.
And as I will discuss in a few minutes, you will see that despite the year-over-year decrease in revenue, IDT energy had another very profitable quarter. Within IDT telecom revenues declined 2.5% year-over-year, but the majority of the decline was in our consumer phone services segment, which we have been harvesting for a few years now. In our key Telecom Platform Services segment, TPS, which houses our retail calling card business, and our wholesale carrier business, revenue declined 1.2% year-over-year to $290.4 million, virtually flat compared to the relatively steep declines we saw in recent quarters.
And on a sequential basis, TPS revenue actually grew by $15.2 million or 5.5% from Q1 2010 to Q2 2010, partially because of seasonal factors. But we do believe that the increase is evidence of improvement to TPS’s top line as well. This sequential increase in revenues has significance to me, because both in fiscal 2008 and fiscal 2009, TPS revenues declined $13.4 million and $26.2 million respectively between Q1 and Q2.
So the $15.3 million increase from Q1 to Q2 in 2010 is an impressive turnaround. Our telecom team has managed to stem the year-over-year revenue declines and deliver a sequential increase. Despite fierce competitive pressures and lower prices in several of our key business lines, rapidly falling rates for prepaid cellular services, which is a major alternative solution for our calling card customers, reductions in immigration associated with the global economic decline, and the continuing fraud in the prepaid card industry.
Though the practice of advertising more minutes than the cards can deliver has now shifted away from many of the larger established players, the smaller operators that fly under the radar screen of regulatory authorities. By line of business within TPS, wholesale carrier services revenue increased by 3% year-over-year, and 4% sequentially. US retail revenues declined 8% year-over-year despite strong growth in international mobile top-up sales, principally as a result of the competitive pressures I just discussed.
During my remarks last quarter, I mentioned that we were able to better synthesize sales and marketing as a result of the recent consolidation of our UTA distribution subsidiary. The early returns from this segment are encouraging with US retail revenues up 6% sequentially during the second quarter led by a strong increase in sales at our UTA distribution channel.
Aggressive sales and pricing overseas augmented by favorable exchange rates helped boost revenues from our European and Asian retail business by 42% and 14% year-over-year respectively, while revenues in South America retail were down 8%. At our consumer phone services segment, which has been in harvest mode since calendar 2005, revenues were down 29.8% or $4.2 million compared to Q2 2009, which is in line with our expectations.
IDT's gross margin companywide was 20.5% in the second quarter of fiscal 2010, a 280 basis points decline year-over-year. The gross margin at IDT telecom fell 370 basis points to 18.8%. For TPS the gross margin fell 280 basis points to 17.6%, while at TPS the 53.8% margin was in line both with expectations and with results from recent quarters, but it was down 1270 basis points from the year ago period, when TPS benefited from non-recurring factors.
At IDT energy, gross margin was up 260 basis points to 26.9% as we continue to generate relatively strong margins against the backdrop of falling energy prices throughout much of the past year. Nevertheless, gross margin compared to the prior quarter was down sharply, 940 basis points as energy prices in Q2 stabilized with the onset of colder weather.
With relative price stability, we expect that the gross margin in future quarters may decline further, but should remain above our historical expectations of 10% to 12%. Companywide, selling, general and administrative expenses were $54.7 million for the second quarter of fiscal 2010, down 17.6 year-over-year and 4.3% below last quarter. We have reduced quarter-over-quarter SG&A spend in seven of the last eight quarters. SG&A as a percentage of revenues has declined by 26.9% to 15% during that time frame.
The reduction in corporate overhead, and 53.2% year-over-year to just $2.8 million was something of an anomaly as we benefited from one-time reversals for healthcare and legal costs. We expect the current rate for corporate overhead going forward will be below $20 million annually, just one third of its level prior to our corporate restructuring program.
Telecom’s SG&A expense was 14.6% year-over-year to $44.1 million with $42.2 million distributed to TPS. Reductions in headcount, employee compensation, and certain production costs were primarily responsible for the decline. SG&A at IDT energy declined to $4.5 million, down 22.9% year-over-year primarily as a result of reduced sales commissions.
As you may recall, in Q4 of fiscal 2009 IDT energy restructured its sales and marketing effort to improve the quality of its contacts with customers and reduce churn. The new strategy has had very favorable impact on customer churn, which fell 2.6% for Q2 2010, cut nearly in half from 5% in the year ago quarter, and down slightly from 2.7% in Q1. While some of the reduced churn is undoubtedly related to relatively low energy prices, we believe that our restructured sales strategy has also had a significant impact.
The restructuring also impacted the pace of new customer acquisitions and hence commissions paid. Total meters at the end of the second quarter were 366,000, down 10.4% year-over-year, but a more modest 1.7% decline sequentially. While we do not expect to return to the exceptionally strong net meter growth rates that we achieved early in fiscal 2009, we do expect to again show modest net meter growth on a quarterly basis this fiscal year, and as a result expect a commensurate rise in commission costs.
IDT's adjusted EBITDA for the quarter was $17.7 million, a 14.7% decline from the year ago period when both telecom and energy reported exceptionally strong results. Over the last four quarters, IDT has generated $53.9 million in adjusted EBITDA, and by that standard this was stronger than our average run rate. Telecom contributed $11.3 million to the quarter’s EBITDA total with $8.1 million from TPS.
And IDT energy’s contribution was $11.9 million. Depreciation and amortization costs came in at $8.4 million, 30.5% below the year ago quarter and continuing the year’s downward trend, has more equipment has become fully depreciated and new capital spend has decreased as we completed the migration from an equipment intensive TDM network to a versatile Internet protocol network.
Income from operations was $7.6 million during the quarter, including the impact of $1.6 million in restructuring charges, and $1.4 million in research and development costs primarily generated by our alternative energy initiative in Israel, IEI, and our Fabric TV venture.
Income from continuing operations was $4.1 million, including the impact of $2 million in net interest expense. The interest expense is associated mainly with our mortgages and capital leases, and is not currently being offset by much interest income as our extremely liquid short-term investments are producing minimal yields in the current interest rate environment.
Net income attributable to IDT formally referred to as net income after minority interest was $3.7 million. This compares quite favorably with the loss of $62 million in the year ago quarter. Year-to-date we are now basically net income breakeven at $200,000. Through the first six months of last year, we had a net loss of just below $100 million. It has been a while since IDT has reported net income that was not due to one-time gains from asset sales or legal actions. So I would like to echo Howard’s sentiments and take just a moment to acknowledge the work of the 1100 employees that over the last 18 months have battled to make IDT a better company.
Now looking briefly at the balance sheet, as expected, the benefits of our improved operating performance have begun to show. We increased our cash and marketable securities balance by $7.3 million this quarter, and our working capital by $7.9 million, causing our current ratio to increase from 1.19 to 1.22. Similarly, short-term liquidity has improved nicely as we selected by our quick ratio increase from 1.06 last quarter to 1.10 this quarter.
Turning to the statement of cash flows, we generated $13 million in cash from operating activities for the quarter, and $15.3 million year-to-date. This compares to net cash used in operating activities of $92.9 million in the first half of 2009. That is an improvement of $108.2 million and in line with our improvements in net income.
That about wraps up my discussion of our results for the second quarter of fiscal 2010. Since becoming CFO about 15 months ago, I look forward to the day that we could deliver the news on this type of successful quarter to our investors, who have shown great patience; and to our employees who have shown great dedication, perseverance and hard work.
I'm truly proud of what we accomplished here so far. And I look forward to building on our work.
I just want to remind anyone who has a question to e-mail it to us at invest@IDT.net, by the close of business tomorrow March 12. If we can constructively answer your question, we will post our response on our website, and through a Form 8-K as early as Wednesday, March 17th following the market close.
I hope everyone is enjoying the first signs of spring that have appeared this week after a long tough winter. And I thank you for your continued interest in IDT.
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