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IDT (NYSE:IDT)

Q1 2012 Earnings Call

December 12, 2011 5:15 pm ET

Executives

Samuel Jonas - Chief Operating Officer

Howard S. Jonas - Founder, Chairman, Chief Executive Officer, Chairman of Nominating Committee and Chairman of Genie Energy Ltd

Bill Ulrey - Vice President of Investor Relations & External Affairs

Bill Ulrey

Welcome to IDT Corporation's First Quarter Fiscal 2012 Earnings Presentation. This is Bill Ulrey, IDT's Investor Relations Officer. In this presentation, IDT's Chairman and Chief Executive Officer, Howard Jonas; and Chief Operating Officer, Samuel Jonas, will discuss IDT's financial and operational results for the 3 months ended October 31, 2011.

Both this audio file consisting of management's prerecorded remarks and our earnings release are available on the Investor Relations page of the IDT Corporation website, www.idt.net.

The earnings release has also been filed on a Form 8-K with the SEC. If you have any questions for management related to the announced results after listening to management's presentation and reading the company's earnings release, please e-mail them to us at the following address: invest@idt.net no later than the close of business on Thursday, December 15. 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 Monday, December 19, 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 audio presentation 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 either 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 this presentation and in our written responses to questions thereafter, we make reference to adjusted EBITDA. Adjusted EBITDA for all periods discussed during our remarks is a non-GAAP measure representing income from operations or loss from operations, exclusive of depreciation and amortization and other operating gains or losses.

Adjusted EBITDA is one key financial metric management uses to evaluate the operating performance of the company and its segments. A schedule provided in the earnings release reconciles adjusted EBITDA to the nearest corresponding GAAP measure, income or loss from operations for each of our segments and for the company as a whole.

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

Howard S. Jonas

Thank you, Bill. On October 28, IDT completed the spinoff of Genie Energy to our shareholders. The spinoff reflects years of effort here at IDT. We built an entire new and exciting business segment from scratch, then we separated from IDT where its long-term potential for shareholders could best be realized.

We have generated value for our shareholders in various ways during our history. From the IPO of Net2Phone to selling IDT Entertainment to paying dividends and now spinning off Genie Energy, we find the opportunities to take the bold moves necessary to realize value.

With Genie now standing on its own, IDT offers a more focused investment opportunity. There is a remarkable transformation going on within IDT Telecom that holds tremendous promise. And now, we can also shine a brighter light on Fabrix surge and our Spectrum licenses and our Net2Phone IP, all of which have upside potential.

Samuel Jonas, our Chief Operating Officer, will be going over the quarter's financial results with you shortly, but I want to point out the profitability of the first quarter of fiscal 2012 was impacted by the $10 million settlement of an outstanding legal claim by T-Mobile resulting from a dispute over a wholesale supply contract.

Also in the quarter, IDT paid fiscal 2011 performance compensation to certain employees which were accrued in the course of last year totaling $5.7 million. That payment, along with the T-Mobile settlement, represented about a $16 million reduction in cash flow from operations. Had it not been for these items, our cash from operations would have been positive on the quarter.

In light of these results and our continued confidence in the profitability of our operating businesses, earlier today, IDT's Board of Directors declared a dividend of $0.13, slightly under $3 million for the first quarter. This reflects our determination to continue to return value to shareholders as the company's performance, financial resources and strategic situation permits.

Now I'd like to talk at a high level about IDT Telecom. There are 2 competing storylines within our core businesses. One is the decline of some of the lines of business traditionally associated with IDT Telecom, our Consumer Phone Service businesses, traditional prepaid calling card sold in independent retail stores and bodegas, and our cable telephony businesses are in secular decline. Here, our strategy is simple: to reduce our cost and generate as much cash as possible for as long as possible.

On the other side of the coin are the innovative new products and services such as the Boss Revolution payment platform and international mobile top-up, which along with our revitalized wholesale carrier business, have become the key drivers of our top line growth. In fact, Boss Revolution, which we launched less than 3 years ago in the United States, already generates higher revenue than all of our traditional prepaid calling cards sold in the U.S. through comparable channels. Boss Revolution-related revenue this quarter increased over 400% compared to the year ago.

Boss Revolution, IMTU, our Wholesale International Termination Service and some of our other growth businesses have enormous potential, but they generally operate on lower gross margins than the businesses in decline. As a result, our aggregate gross margin has declined significantly over the past several years and will likely continue to fall. However, we have been growing revenues so fast that our gross profits have been relatively stable, and we hope to grow it from here over time.

We are pushing to expand sales of prepaid calling cards sold through national retailers. As you may know, IDT is the exclusive calling card provider for Walgreens. And during the quarter, we signed an exclusive deal to sell prepaid calling cards with CVS [ph] in its 7,000-plus locations. Stay tuned for more big retailers.

There are 2 keys to growing IDT Telecom's gross profit. One is to improve and enhance our key differentiating assets, our access to immigrant communities around the globe, a unique transactional platform and our relationship with nearly all of the world's significant telecom carriers. The second is to build the new products and services to take advantage of those assets.

In Boss Revolution, we're beginning to see the remarkable potential of this approach. Since its rollout in early 2009, Boss Revolution has become one of the fastest growing retailer portals in the market with over 20,000 registered retailers. But perhaps more significantly, Boss Revolution is transforming the way IDT communicates and does businesses with our distributors, retailers and customers. It allows us to establish a direct and real-time dialogue with them.

With Boss Revolution, we can roll out an ever-growing portfolio of products in a much faster, dynamic and cost-efficient way. Boss Revolution is much more than just an international calling service. It's a transaction platform that can handle a vast array of payment services. Through the Boss Revolution Web portal, any retailer with an Internet connection can provide PINless, affordable, international, long distance to its customers.

Now we are also offering IMTU, prepaid minutes that can be transferred overseas directly and instantly to a friend or family member's mobile phone through Boss Revolution. And we're working to build or purchase additional products and services like money transfer and bill payment services that will complement these existing offerings.

Ultimately, Boss Revolution will become a powerful one-stop shop for retailers and consumers. We are also taking Boss Revolution global. In the past few weeks, we launched Boss Revolution in the U.K., and we'll continue expanding its geographic footprint in the months ahead.

Now let me briefly update you on our other businesses. Fabrix continues making strides in the marketplace. The major cable operator that is utilizing Fabrix to provide cloud-based DVR continues to expand the rollout of its service and is giving Fabrix rave reviews. This quarter, Fabrix also successfully deployed its deep video storage with a Tier 1 cable operator in Canada.

In addition, we are making major inroads in Europe where Fabrix recently closed a cloud-based DVR deal with a major European telco. It's clear that a highly-efficient video-centric storage demand is growing, and that Fabrix solution offers superior technologies, scalability and economics to our customers.

Zedge continues to grow robustly. Its signature app has more than 12 million active installs. That makes Zedge one of the top 15 most downloaded apps across Google's Android Marketplace. We recently started catering to the gaming community, which has the same demographics as our users and hope to ramp up this effort during the coming months.

The Zedge website and Android app were also recently updated to improve the user experience and increase stickiness. ICTI, which holds our Net2Phone IP, is moving forward in its effort to monetize its important portfolio.

Finally, we continue to work to monetize our fixed wireless point-to-point Spectrum licenses. We believe the Spectrum will prove valuable to wireless carriers who must expand their network capacity with backhaul build-outs.

These business and assets have tremendous upside potential and are a wonderful complement to our core telecom operations. I believe there'll be lots of good news from IDT in the remainder of fiscal 2012.

Now I'm going to turn the call over to Samuel to discuss the quarter's financial results.

Samuel Jonas

Thank you. IDT's revenues for the first quarter of fiscal 2012 were $376.8 million, a 21.6% increase year-over-year and a 4.3% increase quarter-over-quarter. 98% of our revenue is generated by the Telecom Platform Services segment or TPS within IDT Telecom. Therefore, I will focus my remarks mostly on the results at TPS.

Minutes of use at TPS increased to 7.3 billion minutes for the quarter, a 20% increase year-over-year and a 4.5% increase quarter-over-quarter. Both the year-over-year and quarter-over-quarter growth were led by our Wholesale Terminations business.

TPS revenue for the quarter totaled $369.1 million, a 22.9% increase year-over-year and a 4.5% increase quarter-over-quarter.

Following the spin-off of Genie Energy, we have broken down TPS into 4 categories that share certain common elements in order to better describe our operations and results: One, Wholesale Termination Services is our global carrier business, which terminates international long-distance calls around the world for Tier 1 fixed line and mobile network operators, as well as other aggregators. Wholesale revenue during the quarter was $187 million, increasing 33% year-over-year and 6.5% quarter-over-quarter.

Our managers and employees in this business have done an outstanding job executing pricing and costing strategies and continue to substantially increase our share of the international long-distance market. Wholesale Termination Services sales represented 50.7% of TPS' total revenue for the quarter.

Two, Retail Communications include sales of our international long-distance calling products, primarily to immigrant communities worldwide with core markets in the U.S. and Europe. It includes sales generated by Boss Revolution, mobile applications and traditional prepaid calling cards such as Boss, La Leyenda, Feliz and Pennytalk.

Retail Communications generated $131.9 million in revenue in Q1, an 11.5% year-over-year increase and a 3.3% quarter-over-quarter increase. Boss Revolution was the key growth driver, partially offset by a continued decline in sales of traditional IDT-branded disposable calling cards.

The growth in Boss Revolution has been phenomenal. And during this quarter, its sales surpassed revenues generated in the United States from traditional prepaid calling cards sold in comparable channels. Retail revenues represented 35.7% of TPS revenue for the quarter.

Three, Payment Services revenue includes international mobile top-up products or IMTU, as well as gift cards and our debit card services. IMTU is sold both through traditional cards as well as the Boss Revolution payment platform. We sell gift cards in both the U.S. and Europe. We also offer a reloadable debit card and BIN Sponsorship services in Europe through our bank in Gibraltar.

Payment Services revenue was $35.2 million in the first quarter. Sales grew 16.5% year-over-year and 7% quarter-over-quarter. The year-over-year growth was driven by the success of our IMTU products. However, because of increased competition in the IMTU marketplace, sales of IMTU products are likely to grow at a slower pace in the remainder of fiscal 2012.

Future growth will be contingent, in large part, on our ability to enter into new IMTU partnerships with wireless providers, as well as on our recently launched initiative to sell IMTU through the Boss Revolution payment platform. Payment Services revenue equaled 9.5% of TPS revenue for the quarter.

Number four, Hosted Platform Solutions enables cable companies and other operators to leverage our proprietary networks, platforms and technology to provide custom communications solutions to their end customers. Revenue for the quarter was $15 million, a 23.5% decrease year-over-year and a 12% decrease quarter-over-quarter. The largest contributor in this category, our cable telephony business, is in harvest mode.

The decline in revenue is primarily due to the loss of cable telephony's largest customer, Bresnan, which terminated its agreement with IDT as part of its sale to Cablevision. As part of the termination agreement, IDT received $14.4 million in cash in the second quarter of fiscal 2010.

IDT also continued to provide transition services to Bresnan through the fourth quarter of fiscal 2011. This quarter was the first in which Bresnan was not one of our customers. Therefore, year-over-year comparisons for the remainder of fiscal 2012 will mostly like -- will most likely be consistent with this quarter's results. Hosted Platform Solutions accounted for 4.1% of TPS revenue for the quarter.

Overall, TPS gross margin in the first quarter was 14.3%, a 290-basis point decrease year-over-year and a 110-basis point decrease quarter-over-quarter. The decrease in gross margin reflects the loss of our high-margin cable customer, Bresnan, as well as the product mix shift discussed earlier. Sales of higher-margin traditional calling cards are declining, while our lower margin Wholesale Termination Services, Boss Revolution and IMTU sales are rapidly increasing.

In addition, during Q1, the gross profit and margins for European calling card businesses was negatively impacted by the weakening of the European currencies versus the U.S. dollar. Margins in the Wholesale Termination Service business continue to decline as well.

TPS' SG&A expense was $44.9 million. SG&A for the quarter increased 8.2% year-over-year, primarily due to an increase in TPS variable cost structure, driven by strong top line growth. As a percentage of TPS' revenue, SG&A expense declined to 12.2% compared to 13.8% in the year-ago period and 13.4% in the prior quarter.

Variable SG&A includes, among other expenses, marketing, bad debt, transaction processing, cost and internal sales commissions that closely track top line growth. In particular, variable SG&A costs such as internal sales commissions and transaction processing costs have grown rapidly as a result of IDT Telecom's continued effort to grow its internal retail direct sales force in the U.S. and by the explosive growth of Boss Revolution. Excluding these variable costs, SG&A expense was relatively flat year-over-year.

In the first quarter, IDT recognized a higher level of bad debt reflecting our inability to collect from a specific Wholesale Termination customer. In general, our Wholesale Termination business is experiencing higher liquidity and/or solvency risks in the Wholesale Termination marketplace than in prior periods, and we are tentatively monitoring our credit exposure and the credit quality of our wholesale trade partners.

TPS' depreciation and amortization expense was $3.8 million in the first quarter of 2012, a 19.9% decline from the year-ago period and a 1.1% decline sequentially. The slowing in the rate of decline in depreciation and amortization expense reflects the normalized levels of depreciation and amortization after a period of sustained reductions related to the move to an IP-based network and reduced capital expenditures.

TPS generated $7.7 million in adjusted EBITDA in the first quarter. That represents a 14% increase compared to the prior quarter or a 24.6% decrease compared to the year-ago period. TPS' loss from operations was $7.3 million in the first quarter, including the impact of $11.3 million in costs primarily related to the settlement of a lawsuit previously filed by T-Mobile against IDT Telecom for breach of contract.

Income from operations was $5.5 million in the year-ago quarter and $1.8 million in the prior quarter. Also within IDT Telecom, our CPS segment, which is in harvest mode, generated $5.4 million in revenue, a 27.7% decrease year-over-year, which was in line with our expectations.

The All Other segment generated $2.3 million in revenue, a 20.5% increase year-over-year and a 7% increase quarter-over-quarter. Fabrix and Zedge generated almost all revenue in this segment.

The All Other segment contributed gross profit of $1.9 million, a 13.8% increase year-over-year. Gross margin for the All Other segment during the quarter was 79.9%.

SG&A expense in the All Other segment was $2.2 million, including $1 million in R&D expense. SG&A expense declined 18.1% compared to the year-ago quarter and 13.1% compared to the prior quarter.

The All Other segment generated a loss from operations of $900,000 for the first quarter compared to a loss of $1.3 million in the previous quarter.

For the fourth quarter, on a consolidated basis, IDT generated gross profits of $57.4 million, virtually identical to the year-ago quarter, but a 2.9% decrease compared to the prior quarter. TPS accounted for $52.6 million of the gross profit, a modest 1.7% increase year-over-year and a 2.9% decrease quarter-over-quarter.

IDT's SG&A expense, including $1 million in R&D expense, was $52.8 million, an increase of 5% year-over-year, but a 2.9% decrease quarter-over-quarter.

Corporate SG&A expense was $3.9 million, a 5.7% increase compared to the year-ago quarter and a 44% increase quarter-over-quarter. Corporate SG&A will decline over the coming quarters as a result of the Genie spin-off.

IDT's adjusted EBITDA in the first quarter was $4.6 million, a 38.2% decrease compared to the year-ago quarter and a 3% decrease quarter-over-quarter, reflecting the increase in corporate SG&A.

IDT's loss from operations was $11.1 million in the first quarter compared to income from operations of $4.3 million in the year-ago quarter and a loss from operations of $800,000 in the prior quarter. After taking into account the impact of discontinued operations, the net loss attributable to IDT for the quarter was $4.3 million or $0.21 per basic and diluted share.

Turning to our balance sheet and statements of cash flows. The assets we spun-off of Genie Energy included $106 million in cash, of which all but $11.9 million was deconsolidated in the balance sheet as of October 31. As a result, IDT has $146.5 million in cash and cash equivalents, including $17.4 million of restricted cash and cash equivalents on its quarter end balance sheet as compared to $240.3 million at the close of the prior quarter.

At October 31, 2011, IDT's total assets were $394 million and total liabilities were $323.5 million compared to total assets of $568.2 million and total liabilities of $364.4 million at July 31, 2011. The decline reflects the $94.1 million in cash and $30.7 million of other net assets distribute to Genie Energy in the spin-off.

Net cash used in operating activities was $13.4 million in the first quarter compared to net cash provided by operations of $3.6 million during the year-ago quarter. This quarter's cash used in operating activities includes the impact of the T-Mobile settlement and associated costs and $5.7 million in 2011 employee performance compensation paid during the quarter. Had it not been for these items, IDT would have reported positive cash from operating activities.

Capital expenditures in the first quarter totaled $1.9 million compared to $3.3 million in the year-ago quarter. IDT also paid $5.2 million in dividends to stockholders during the first quarter.

That concludes my remarks. However, we would like to hear from you with your questions about the quarter's results. If you have a question, please send it to us via e-mail to invest@idt.net before the close of business this Thursday, December 15, 2011. If we can constructively answer your question, we will post our answer in a document available on our website and in a Form 8-K filing as early as Monday, December 19, 2011, following the market close. Thank you very much.

Question-and-Answer Session

[No Q&A Session For This Event]

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