IDT Corporation F3Q10 (Qtr End 04/30/2010) Earnings Call Transcript

| About: IDT Corporation (IDT)

IDT Corporation (NYSE:IDT)

F3Q10 (Qtr End 04/30/2010) Earnings Call

June 10, 2010 5:15 PM ET

Executives

Bill Ulrey – Investor Relations Officer

Howard Jonas – Chairman and Chief Executive Officer

Bill Pereira – Chief Financial Officer,

Operator

Bill Ulrey

Welcome to IDT Corporation's Third Quarter Fiscal 2010 Earnings Presentation. This is Bill Ulrey, IDT's Investor Relations Officer. IDT's Chairman and Chief Executive Officer, Howard Jonas; and Chief Financial Officer, Bill Pereira, will be presenting IDT’s financial and operational results for the three months ended April 30, 2010.

This quarter we are following the same announcement format we used in prior quarters. Our earnings release is available on the Investor Relations page of IDT Corporation's website, www.idt.net. The earnings release is also been filed on a Form 8-K with the SEC. These remarks are pre-recorded.

If after listening to management’s presentation and reading the company's earnings release, you have any questions for management, please e-mail them to us at the following address, invest@idt.net. We will accept questions through the close of business tomorrow, June 11th. 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, your firm's name, and our answer on the Investor Relations page of the IDT website as early as next Wednesday, June 16th, after market close. We will also file a Form 8-K with the SEC containing the questions-and-answers.

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 the factors that may cause actual results to differ materially from those that we forecast.

In the prepared remarks you’ll 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 from operations, exclusive of depreciation and amortization, impairments, restructuring charges, net gains on settlements and the gain on the sale of an interest in AMSO, LLC. 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.

To begin the discussion of our financial and operating results, here is IDT Corporation's Chairman and CEO, Howard Jonas.

Howard Jonas

Thank you, Bill. Good afternoon to everyone. I’m Howard Jonas, Chairman and CEO of IDT. Welcome to our management discussion of our third quarter 2010 results. Our CFO, Bill Pereira will take through the details of our performance and financial condition in a few minutes. So I will begin by discussing the big picture, both in terms of our results and where we are heading as a company, and update you on the status of several key growth initiatives.

For the third quarter of our 2010 fiscal year, we are reporting net income attributable to IDT of $12.6 million and earnings per diluted share of $0.58. This is our second consecutive quarter of positive net income and brings total net income attributable to IDT to the first three quarters of the year to $12.8 million or $0.60 per share.

By every key indicator of profitability and liquidity performance that we look at adjusted EBITDA, operating income, net income, cash flow and other balance sheet metrics, this was a good quarter. I very much appreciate all the hard work contributed by everyone here at IDT. A credit belongs to management and employees to our organization. I hope they would take pride and our accomplishment.

As a company, we remain focus first on improving operational performance and explaining growth opportunities within our core telecom and energy businesses, subject to the same fiscal discipline that drove our turnaround effort. And second, we are pursuing a handful of promising high growth opportunities through a careful and responsible allocation of capital. I’m going to focus my remarks on these opportunities.

Let me begin with IDT Energy, since we began this business, IDT Energy has operated exclusively in New York state. Our rapid growth has made us the largest independent residential energy supply company in New York, serving over 360,000 meters in virtually every territory in the state.

In the third quarter, we began testing operations and marketing and select utility territories in New Jersey and Pennsylvania. Many factors will determine the success of this plan geographic expansion and some of the most important ones including the particular regulatory regimes, the policies of the participating utilities and the competitive environment are not within the span of our control.

We also enrolled a small number of customers in both states. Revenues from these new customers will begin in Q4 but we’re likely not be impactful immediately. Also bear in mind that any sustain effort to build a customer base until significant customer acquisition costs and gross margin pressure. Keeping all this in mind, I do believe there is tremendous potential for IDT to grow our business outside of New York. Perhaps the most encouraging development at IDT over the past quarters has been the turnaround at IDT Telecom.

Our IDT Telecom team has overcome many obstacles and in very difficult markets to deliver consistently positive adjusted EBITDA every quarter this year. And even manage to grow revenues in the TPS segment for the past two quarters, despite the fact that Q3 is typically the weakest quarter of our fiscal year.

More over telecom continues to develop and rollout terrific products and innovative services, like BOSS revolution and the PennyTalk app for the iPhone. Telecom’s management and employees have done a terrific job and I want to congratulate them on a job well done.

Now let me give you an update on Fabrix. As you may recall, Fabrix focuses on providing video storage and delivery platform for unicast television that can be use by cable operators, telecommunication providers and ISDs. A major system operator is utilizing Fabrix software for their Cloud DVR [field] trial. We hope to have more concrete accomplishments to report in the near future.

Zedge, our destination for free mobile content continues to build its revenues and traffic. It now use an excess of 24 million unique visitors per month through its website, mobile site and Android application. Zedge continues to focus on user experience, expect to rollout some new interesting products over next three quarters that we believe will drive additional user growth and revenue. Zedge is leveraging its large and growing user base to increase revenues. As a result in the quarter Zedge generated $100,000 in adjusted EBITDA and has operated a breakeven year-to-date.

With our Genie Energy division at AMSO, our shale oil joint venture with Total operating on federal land in Western Colorado. We continue to research, develop and design the oil shale pilot heating test during the third quarter. We expect to begin conducting the test late in this calendar year or early in 2011. Assuming we get all the necessary equipment procured and then stored on time.

The initial pilot test will include an inclined road drove well below both the Mahogany Shale and (inaudible) that runs through the middle of the shale belt. We hope that the pilot test will verify the accuracy of several of our key underlying assumptions and service the basis for additional test that will help us refine our process, demonstrate our approach for effective environmental protections and prepare our proposal for commercial lease.

In Israel, IDT continues to evaluate and appraise the oil shale resource within its exclusive shale oil exploration and production lease area, although it’s in such a process will get significantly for main source. IEI has begun permitting and other proprietary work essential to the construction and operation of the pilot plan.

Pilot test operations could began as early as calendar year 2011 and as in Colorado test results will serve as the basis for permitting design of any future commercial project. IEI incur cost of $1.6 million during the third quarter and $3.7 million in total for the first three quarters of fiscal year. It is worth noting then past 18 months Jordan have signed significant deals with Royal Dutch Shell, SD Energy, a U.K. based firm to develop their oil shale reserves.

In Morocco several firms including Petrobras, Total and SD are in various stages of oil shale projects. While Turkey, Sierra and Egypt are set to begun working on plans to develop their shale deposits. As we continue to develop IEI’s program it will be critical to bring in other parties as we did in AMSO’s case through the joint venture with Total.

That is why I’m particularly pleased and proud that Michael Steinhardt, the legendary founder of Steinhardt, Fine, Berkowitz & Company, a pioneering hedge fund that is outperform the S&P 500 by 300% over 30 years has agreed to become IEI’s Chairman and to assume an active role in its strategic development.

Not only will IEI greatly benefit from Michael business agreement but we also have the assistance of the savvy investor with great experience. Michael has also purchased a stake in our Genie Shale business, which includes IEI for $5 million and has the option to make an additional $5 million investment.

Also during the quarter Wes Perry invested $400,000 in the Genie business. Wes is not only Chairman of Genie, he is also the CEO of E.G.L. Resources from which AMSO purchase its oil shale lease in Colorado and a very savvy Texas based oil and gas investor.

Both men bring extraordinary talent to the table and will be instrumental and ensuring the Genie’s oil shale ventures in Israel and Colorado to fill their enormous potential. Even after factoring these investments in future IDT generated $32.2 million in cash from its operating activities and added about $35.5 million to its cash and marketable securities during the quarter. Although results benefited somewhat in non-recurring events, I’m very pleased with our operational performances this quarter.

Before I finish, I would like to point out the ambition to our strong balance sheet and the cash generated by operating business. There is also great potential in the technology and intellectual property we have and are developing.

When we run into telecom business, it used of course several dollars to make an international call. Through call back to internet technologies and finally through VoIP, IDT led the charge to bring that cost down. The same call cost just pennies today. Through that effort, IDT gained important patents related to voice over internet technologies.

And now we are fighting to defend our telecom IP. I believe we will ultimately prevail. Now, we are following similar paths in the energy field. It is no secret that words conventional or reserves are running out and that America and our allies have tremendous reserves of oil shale and other unconventional fields.

In Colorado and in Israel, IDT is pioneering new approaches to extract oil from shale. The patents that will result would be an important technology for future unconventional fuels productions. Inevitably, unconventional reserves will power the world and world will use IDT technology to help make it happen.

The migration to unconventional fuels can break America and the worst dependence on energy sold to us by hostel totalitarian regimes. Imagine how strong we would be if we do not have to waste hundred of billion of dollars a year to buy oil from those countries. By shifting to unconventional sources for fuel, America will also move to energy independence.

This will lay the ground work for another great American renaissance, a renaissance in manufacturing industry and innovation that counter the current state of decline. President Ronald Reagan often said America is too great for small dreams.

At IDT, we have big dreams for the future and everyone here across all of our businesses is working hard, hitting on also on those different program. The future is communication and energy and we are building valuable intellectual property to complement our great businesses in both fields.

Now, I’m going to turn the microphone over to IDT’s Chief Financial Officer, Bill Pereira, who will discuss the quarter on more detail.

Bill Pereira

Thank you, Howard. Good afternoon, everyone. Howard is right. There is a lot to be pleased about regarding our third quarter of fiscal 2010. We not only continued our streak of improved operational results that begin in 2009 and has continued to the first three quarters of fiscal 2010 but we also benefited this quarter from some one-time events that enhanced our bottom line, improved our cash flow and further strengthened our balance sheet.

Before I discuss our quarterly results though, I want to take note of several developments that inspired during the quarter. I’m particularly pleased that on April 1, 2010, the New York Stock Exchange notified IDT that we had regained compliance with the New York Stock Exchange’s $100 million market capitalization requirement.

NYSE cited our “consistent positive performance with respect to the original business plan submission and the achievement of compliance with the New York Stock Exchange’s $100 million market capitalization requirement” as our reason for being back in compliance.

At the March 30th compliance deadline, IDT's market capitalization was $140.9 million and its 30-day trailing average was $120.8 million. And our market cap has continued to improve since then closing on June 9 at $180.3 million.

Back on January 29th of this year, the State of New Jersey’s Department of Property Management and Construction issued a Notice of Intent to Award a 10-year lease covering our former headquarters building at 520 Broad Street here in Newark. However, the award was never approved by the state’s leasing and space utilization committee and the Notice of Intent to Award has since been rescinded.

The state cited a need to revaluate its Newark office space requirements as well as the cost effect in this of buying a building as opposed to leasing it as the reason for rescinding the lease award. We will continue to monitor further actions from the state closely while examining other waste of realized value from the property.

And finally, the Internal Revenue Service has been auditing our federal tax return for fiscal years 2006 to 2008. Earlier this month, we agreed to adjustments reducing our pending refund claim by approximately $400,000 to $1.8 million and reducing our domestic net operating loss carryforward by $41 million to approximately $215 million. These changes are reflected in our financial statements at April 30, 2010. We expect the paperwork with the IRS to be finalized by July of this year.

Now, let’s take a look at our financial results for the third quarter of fiscal 2010. Company wide, revenues were $355.4 million, a slight $1.5 million decline compared to Q3 2009 and $7.2 million decline or 2% compared to the prior quarter. However, these declines occurred at IDT Energy. And as we have mentioned repeatedly on previous calls, fluctuations in revenue alone are not the best criteria for evaluating performance in the energy business.

IDT Telecom reported revenues of $300 million with our telecom platform services segment accounting for $291.3 million of that total. That represents 5.5% percent year-over-year revenue growth for TPS and thereby reverse that at least for this quarter, the downward trend and year-over-year revenues that we have been experiencing for several years.

Several factors contributed to this increase. First, in the U.S., we continued to benefit from the recent consolidation of our UTA subsidiary which has allowed us to leverage at the UTA distribution network more effectively as we rollout new calling card brands and consolidated existing offerings.

Secondly, we benefited in the U.S. from rapid growth and new product categories, notably international mobile top-up or IMTU. Thirdly, as a result of our litigation and some FTC and State Attorney’s General Enforcement Actions, there appears to be less fraudulent activity among the largest players in the calling card industry, thereby leveling the plane field somewhat.

And finally, we continue to see growth from new calling card products in continental Europe. By line of business within TPS, U.S. retail sales grew by 12% year over year while European retail sales rose 35%. South America and Asia retail revenues also grew by 4% and 7% respectively. This growth in our global retail businesses was somewhat offset by a 1% decline in wholesale carrier revenues and by 7% reduction from our cable telephony services unit.

Within U.S. retail, revenue growth was generated primarily by international mobile top-up products and prepaid calling cards. Sequentially, TPS’ revenue also increased slightly, climbing $920,000. Though, that is a very modest increase, please keep in mind that the third quarter, the three months ending April 30th has three fewer calendar days than the three-months ending January 31st.

All other things being equal, we would have expected a sequential decrease in revenues of at least 3%. Moreover, there are fewer significant holidays in Q3 than in Q2 and holidays are a key driver of prepaid calling card sales. As a reference point, in fiscal 2009, TPS revenue dropped $17.7 million from Q2 to Q3.

So the fact that we increased revenue quarter over quarter even very slightly is a significant accomplishment. Although, TPS’ results were encouraging this quarter and the trend has improved markedly in recent quarters. Investors should be mindful that virtually all of their businesses within this segment face tough challenges on a variety of fronts.

Including the shrinking markets for both wholesale carrier and prepaid calling card services, continuing price in margin pressures on wholesale carrier in particular and substitution towards wireless and IP based product offerings. It is a tribute to management employees of our telecom division that they have been able to grow the top line and thereby outperform other players in the industry.

Consumer phone services or CPS, the other reporting segment within IDT Telecom continue to perform in line with expectations, contributing $8.6 million in revenues, a decrease of 31.4% year-over-year and a 13.1% decline sequentially. Going forward, I don’t expect to spend much time discussing CPS which has been in harvest mode since calendar of 2005 and is generally performing inline with our expectations.

Within our Genie Energy Division, IDT Energy generated $53.8 million in revenue during Q3, with sales of electricity contributing $29.4 million and sales of gas contributing $24.4 million.

Year-over-year, IDT energy revenues declined 19.3% primarily because of low gas prices, reduced consumption per meter and a net decrease in IDT Energy’s customer base. Sequentially, the 11.4% revenue reduction reflected seasonal declines in therm consumed and fewer days in the third quarter.

Gas revenues fell 32.8% year-over-year and 22.7% sequentially. Revenue per therm declined 8.3% compared to the year-ago quarter and 5.3% sequentially because of falling prices for natural gas.

Therms consumed decline 26.7% year-over-year reflecting a warmer spring than during the year-ago period. Changes in the consumption profile of our customer base at lower therms consumed per meter and a decrease in our customer base that I mentioned previously.

Sequentially, therms consumed declined 18.5% as the prime heating season due to a close. Revenue contributed by sales of electricity, $29.4 million in the third quarter declined 3% year-over-year and was relatively stable on a sequential basis, increasing by just nine tenths of a percent.

As we have described in previous quarters, IDT Energy restructured its sales and marketing programs in Q4 2009 to among other things reduced churn. As a result the pace of gross customer acquisitions slowed below the rate of churn, decreasing our year-over-year metered accounts.

Total meter serve electric and gas combined declined 12.1% year-over-year to 364,000 meters. However, that decline leveled off quarter-over-quarter, reflecting lower churn rates generated in part by a restructured sales and marketing programs, higher rates of gross meter acquisitions in New York and modest additions from IDT Energy testing of the retail markets in several territories within New Jersey and Pennsylvania.

IDT’s gross margin company-wide was 20.9% in Q3, a 280-basis point decline year-over-year but a 40-basis point increase sequentially. The gross margin at IDT Telecom fell 310 basis points to 19.1%.

At TPS, the gross margin fell 260 basis points year-over-year, while increasing 40-basis points sequentially. The year-over-year decline reflects our broader effort to maintain revenues by cutting prices in the face of continued and tensed competitive pressures, the growth of relatively lower margin business lines including international mobile top-up in the U.S. New lower margin prepaid calling card offerings in both the U.S. and in Europe and a continuation of the general downward trend in margins that are wholesale carrier business.

At IDT Energy, gross margin declined 50-basis points to 29.1% year-over-year, while increasing 220 basis points sequentially. We continue to generate strong margins against the backdrop of relatively stable energy prices. Nevertheless, the gross margin of your electricity sales declined 660 basis points year-over-year as revenue per kilowatt hour rose 6.4% over the same period. This was somewhat offset by an increase in our margin on gas sales, a 270-basis points uptick against the backdrop of an 8.3% decline in revenue per therm.

We anticipate that margins will continue above our long-term expectations of 10% to 12%, provided that energy prices remain relatively stable or decline. But these margin levels are likely to come under significant pressure during times arising energy prices.

Now, let's look at selling, general and administrative expenses. Company-wide SG&A expenses were $52.6 million for Q3 of fiscal 2010, down 21.9% year-over-year and 3.7% sequentially. At this point, we have completed the significant reductions in overhead associated with our successful turnaround effort.

And in the current quarter, much of the sequential SG&A reduction was the net result of non-recurring reductions in payroll taxes and medical benefits. Going forward, changes in SG&A expense levels will be driven largely by the strategic needs of our core businesses, even as we continue our efforts to squeeze additional overhead savings throughout the company.

Telecom's SG&A expense was $43.6 million, with $41.6 million attributed to TPS. For TPS, SG& A expense declined by 14% year-over-year and by 1.4% from the prior quarter. Sequentially, in the third quarter, TPS benefited from the non-recurring reductions in payroll taxes and medical benefits and lower production and marketing costs.

IDT Energy's SG&A expense was $5.7 million, a 16.9% decline year-over-year but a 28.5% increase sequentially. Reduced customer acquisition costs related to the restructuring at the sales and marketing efforts drove the year-over-year decline, while the sequential increase resulted from higher compensation expenses and customer acquisition costs as the pace of gross acquisitions increased.

Corporate SG&A was $1.4 million, down 76.2% year-over-year and 50.7% sequentially. The large decline resulted from the benefit of the non-recurring events I mentioned previously, as well as the tax credit for an employment grant. We still expect the corporate overhead run rate to be between $18 and $20 million annually.

IDT's adjusted EBITDA for the quarter was $18.1 million, a 35.3% increase year-over-year and a 2.3% increase sequentially. IDT Telecom contributed $11.8 million of that total and IDT Energy, an additional $9.9 million.

Corporate reported a negative $1.4 million in our alterative energy segment which consists primarily of IEI for purposes of impact on operating results, was negative $2 million including $1.6 million in research and development costs.

IDT’s equity and the net loss of AMSO was $400,000 in Q3 2010, bringing the year-to-date total to $1.1 million.

Depreciation and amortization cost was $7.6 million, a 30.2% reduction year-over-year and a 9.8% decline compared to the prior quarter. Restructuring charges totaled $2.9 million resulting from personnel reductions incurred during the recently concluded turnaround effort.

This resulted in income from operations of $16.6 million during the quarter, compared to a $24.8 million loss in the year ago period, and a $7.6 million in income during the prior quarter.

The year ago period include an impairment charges of $29.3 million, primarily the goodwill, while other gains primarily from legal settlements contributing net of $9 million in gains during Q3 of the current year.

Net interest expense was $1.6 million in the third quarter and we recorded a $3.5 million provision for income taxes, bringing the total income from continuing operations to $12.5 million and net income attributable to IDT to $12.6 million.

You may recall that in my remarks for the fourth quarter of fiscal 2009. I mentioned that since our turnaround plan had been substantially complete and the global decline in asset prices seem to have stabilized. We were hopeful that the disparity between adjusted EBITDA, operating income and net income that we experienced in 2009 would narrow in 2010. Indeed that is exactly what has happened.

In the first nine months of fiscal 2009, although we had adjusted EBITDA of $36.1 million, we reported an operating loss of $43.1 million and a net loss attributable to IDT of $162.7 million.

Through the first nine months of fiscal 2010, we have reported $45.3 million in adjusted EBITDA, $24.4 million in operating income and $12.8 million in net income attributable to IDT. While, adjusted EBITDA has increased by $9.2 million over the nine-month period last year, operating income has improved by $67.5 and net income has increased by a dramatic $175.5 million.

Turning to the statement of cash flows, we had an exceptional quarter, generating $32.2 million in cash from operating activities during the quarter and $47.5 million year-to-date. This compares very favorably to net cash used in operating activities of $98.3 million during the first three quarters of 2009.

Operating cash flow this quarter benefited from the $9 million in other gains, primarily from the legal settlements that I mentioned previously.

Now, turning to the balance sheet. Hard cash restricted cash and marketable securities balance increased by $35.5 million this quarter and by $41.2 million since the beginning of the fiscal year to $229.8 million.

We now have $88.1 million in working capital, up $21.3 million for the fiscal year. The increase in cash and marketable securities in addition to the strong operating quarter also benefited from the $5.4 million invested by Michael Steinhardt and Wes Perry as Howard mentioned earlier.

That about concludes my discussion of the quarter's results. Although I’m extremely satisfied with our performance in Q3, I will like to caution our investors that the quarter, while operationally strong once again did benefit from several non-recurring events that I highlighted during my remarks.

Looking ahead, we are much focused on continuing the consistent operational performance we've delivered through the first three quarters of this year. Still, as I hope we have made clear, our core businesses operate in every challenging markets.

Finally, I just want to remind anyone who has a question to email it to us at invest@idt.net by the close of business tomorrow, June 11th. 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, June 16th, following the market close.

Thank you for listening and I hope everyone has a great summer.

Question-and-Answer Session

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