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IDT (NYSE:IDT)

Q2 2012 Earnings Call

March 12, 2012 6:00 pm ET

Executives

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

Samuel Jonas - Chief Operating Officer

Marcelo Fischer - Senior Vice President of Finance

Analysts

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

Operator

Good day, and welcome to the IDT Corporation's Second Quarter Fiscal 2012 Earnings Conference Call. [Operator Instructions] In this presentation, IDT's management team will discuss financial and operational results for the 3 months ended January 31, 2011. Any forward-looking statements made during this conference call, either in the prepared remarks or in the Q&A session, either general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those which company anticipates. These risks and uncertainties include, but are not limited to specific risks and uncertainties discussed in the reports that IDT files periodically with the SEC. IDT assumes no obligation either to update any forward-looking statements that they have made or may make, or to update the factors that may cause actual results to differ materially from those that they forecast.

In their presentation, IDT's management may make reference to the non-GAAP measures, adjusted EBITDA, non-GAAP net income and non-GAAP EPS. A schedule provided in the earnings releases reconciles adjusted EBITDA, non-GAAP net income and non-GAAP EPS to the nearest corresponding GAAP measures.

Please note that the IDT earnings release is available on the Investor Relations page of the IDT Corporation website, www.idt.net. The earnings release has been filed on Form 8-K with the SEC. Finally, please note this is being recorded. I would now like to turn the conference over to the IDT management team. Please go ahead.

Howard S. Jonas

Thank you. I'm delighted to be speaking to you, our shareholders, today. As you know, we are once again hosting a live call and our management team will be taking your questions following our prepared remarks.

A number of our shareholders felt we should go back to this format given the growing interest in our various businesses, and we listened. But more importantly, I'm delighted to discuss the major changes that have taken place at IDT. Not counting the Genie operations that we recently spun off, IDT had, for some years, been basically a prepaid calling card company. The world was changing. But to a large degree, we stuck to our legacy market.

But over the past several years, we have transformed IDT, and I am especially excited to be here telling you about it because you are the owners and you are the ones who will reap the benefits for this transformation. Today, we are a profitable company. This quarter, we're reporting positive net income of over $19 million in cash flow from operations, and we have a strong and strengthening balance sheet.

But more important, we have recaptured our innovations spirit, with some sensational products and services that will become leaders in their respective industries.

Let me start with IDT Telecom. We launched Boss Revolution in late 2008. It was a very new concept back then, a very convenient, very inexpensive but also a very high quality service for making prepaid international phone calls from anywhere. You can use it in your home, at your office or from your mobile phone. Boss Revolution started off slowly. As recently as fiscal 2009, we realized less than $1 million a month in revenue. But then it caught fire. Today, Boss Revolution's annual run rate is over $200 million a year. And year-over-year, aggregate revenue from sales via Boss Revolution grew by better than 350%. Just as Amazon digitized retail, we have digitized calling cards. And because of that, we have tremendous economies of scale.

We've changed the playing field from a traditional calling card competition, the same guys were cheating people by offering more minutes on their card than they delivered. Now, they're trying to catch up and copy our new digital model. We'll see if they can compete. Those competitors, however, are under the illusion [Audio Gap] solution platform positions us to be a leader in providing mobile transaction and financial services, to underserved immigrant communities around the world. Because it is very convenient for the customer, very sticky, very slick, very affordable, very accessible and very versatile, we're devising many products and services that will make Boss Revolution the transaction platform of choice for a lot of people around the world during lots of kinds of transactions.

In the coming quarters, we'll be putting additional payment and value transfer services on Boss, and as I've said before, we are working on providing a strong and dynamic money remittance service.

Now once we add that offering to the platform, we'll be going head to head with the leading international money remittance players. We'll beat them at their own game because of our innovative spirit, our presence in the immigrant market and our highly scalable approach to serving these communities.

At the same time, we're expanding the scope of Boss' platform, we're also expanding Boss Revolution's geography. This quarter, we launched Boss Revolution in the U.K. Later this year, we plan to roll it out in other European countries, then we'll take it to Latin America and Asia. The end result will be a global platform for communications and financial services that will be cheap, reliable and convenient.

We're going to do for this new digital financial marketplace just what we did for the calling card marketplace. You'll be able to measure our success by tracking the metrics, the number of minutes, transactions and the rate of international expansion. What we won't do for a while is generate high margins. We are not building a boutique, we are building a volume juggernaut that will compete with and win with a low-cost infrastructure, economies of scale and continuous innovation. Like the most successful retailers, we will win by pushing costs down and leaving no daylight for competitors.

The telecom is not the whole story to IDT, and it's certainly not the only part of IDT where innovation is transforming the way business is done. Our Fabrix business has the most efficient, most dynamic cloud-based video storage solution. Fabrix has been tested by current and future clients, and its solution always outperforms them. As we mentioned in the earnings release, based on the current pipeline, we expect Fabrix to generate $5 million in cash next quarter. For the year, we'd like to bring in close to $20 million in cash, and we want double that the year after.

Current clients who are in the cable industry where we begin to sell to over-the-top providers and telecoms. Also, you will be able to see the growth in the metrics, not only cash but also new customers, the number of homes served by the Fabrix cloud-based DVR and the amount of storage capacity it is providing in that device. Fabrix is poised to break out and take off.

Zedge, a mobile content business, continues its strong growth and currently boasts 42 million unique visitors per month, who downloads 7 million items every day. It is a platform for obtaining and sharing content, ringtones, wallpapers and games that help turn an anonymous phone into an extension of your personality. Zedge continues to grow spectacularly, with more than 15 million active installs of the Zedge app. The Zedge app is among the most popular Android apps globally. Jump, recently purchased by Apple, ranked as the fourth most popular app in the world in 2011, and it consistently remains in the 10 most downloaded apps in the Android market.

Zedge's rich, high-quality dynamic catalog of personalization content, ringtones, wallpapers and the like, each bringing new customers in and drives customers to return for more.

Publishers are now turning to us for distribution of their games and apps because we can deliver meaningful downloads and customers. Our mobile partners include well-known companies like ngmoco, Pocket Gems, MyLookout and Appia. Our users are huge consumers of games, and we plan on making some strategic move in this vertical. Stay tuned.

Also, we plan to be moving our games on to the iOS platform. ICTI holds our VOIP and computer communications-related IP. Our IP includes the seminal patents from these fields. As I have said before, our IP is widely infringed and not just by VOIP providers. This quarter, ICTI started legal action against 3 companies whose technologies depend on our IP and are using that IP without our permission. We will be adding more as we vigorously seek to enforce our rights for the benefit of our shareholders.

IDT Spectrum should soon close pending approvals on the first significant sales from its nationwide portfolio of Spectrum licenses. Eight licenses in major metropolitan areas for $6.8 million. We're in active negotiations for sales of other licenses although none of those deals are yet in the bank. In the long term, it is clear that the wireless carriers roll out their 4G and 5G solutions, the demand for bandwidth are only going to increase and our licenses are the best solution to backhaul all that traffic.

Income is likely to be lumpy and unpredictable but increasingly robust. Historically, IDT has always been about innovation. Our energy level and entrepreneurial spirit have never been stronger than it is now. Across the portfolio of our holdings, IDT Telecom, Fabrix, Zedge, ICTI and IDT Spectrum, there is tremendous value and opportunity, and every one at the company is working very hard to realize its full potential.

And now to discuss the quarter's financial results, here's IDT's Chief Operating Officer, Samuel Jonas.

Samuel Jonas

Thank you. IDT's revenues for the second quarter of fiscal 2012 were $365.4 million, a healthy 7.2% increase year-over-year. Revenues decreased 3% compared to the prior quarter. These comparative trends stemmed primarily from the performance of our telecom divisions, TPS segment which accounted for 97.8% of IDT's revenues in the second quarter of fiscal 2012.

Before turning to TPS, however, I would like to point out that while still not moving the meter, revenue from our All Other segment comprised primarily of revenue generated by Fabrix and Zedge, have grown nicely. Fabrix's and Zedge's revenue were both about $1 million in the last quarter, and increased 42.7% year-over-year. However, Fabrix's revenue is amortized, and consequently, its impact on cash flow is significantly greater. In February, after the quarter closed, we received $5.2 million in cash on a sale, which will be recognized as revenue over 3 years.

TPS' minutes of use in the second quarter at 7.4 billion increased 13.3% year-over-year and 1.6% sequentially. We are frequently asked by investors, "What is your market share based on your minutes of use?" The telecommunications consulting firm's telegraphy [ph] has estimated total international long distance minutes handled by the telecom industry in 2011 at 438 billion minutes and growing at a 4% annual rate. Exclusive of sure VOIP plays likes Skype in network calls, if accurate, our share of the global international long distance market would be approximately 6% based on our latest quarter's minutes of use.

TPS' revenues of $357.6 million were up 7.8% year-over-year, with strong growth in both the retail and wholesale revenues. Retail sales of $133.2 million were up 12.9% year-over-year. The increase in retail sales was driven substantially by growth in sales made over Boss Revolution, our PIN-less prepaid calling and payment platform. We continue to generate very high new customer intake rates for Boss Revolution, and it has become a go-to platform for high quality international phone calls. We are adding payment capabilities to the Boss platform.

New this quarter, Boss Revolution customers can recharge their domestic mobile accounts with T-Mobile, Verizon and AT&T to, and we continue to add recharge partners.

Sequentially, retail sales increased 0.6%, a healthy increase in Boss Revolution revenue was significantly offset by the continued decline in sales of traditional prepaid calling cards and in European sales.

In Europe, the continent's economic troubles has hit immigrant communities, our target market, particularly hard. In addition, our European retail revenues continue to be negatively impacted by the decline in the euro versus the U.S. dollar. Wholesale revenues of $173.7 million increased 7.7% year-over-year but decreased 7.1% sequentially. For some time, we have been growing wholesale revenue rapidly.

But in the second quarter, rates charged by the dominant phone companies in serving our high-traffic Latin American destinations declined significantly, thus lowering permanent pricing industry-wide. This caused both our revenue and our costs for such destinations to decline in parallel, thus reducing our top line but actually benefiting slightly our gross profit. At the same time, wholesale revenues in Q2 were negatively impacted by the loss of certain opportunistic selling opportunities presented in North Africa during Q1.

TPS's gross margin for the second quarter was 15.1% on gross profit of $54 million, a 70 basis point decline from the year-ago quarter, but an 80 basis point increase sequentially. The year-over-year decline reflects primarily the loss of our high-margin cable telephony customer, Bresnan, as well as the continued decline of relatively high-margin traditional prepaid calling cards and the rapid sales growth of lower-margin products, including Boss Revolution and international mobile tablet.

Also, gross profits and margins for our European calling card business continue to be negatively impacted by the weakening of the European currencies versus the U.S. dollar as we generally sell our products in Europe in euros and pounds, but account for them and pay for the related connectivity and termination costs in U.S. dollars.

Margins in the Wholesale Termination Services business declined slightly year-over-year as well. The increase in gross margin compared to the prior quarter was generated primarily by improving margins for Boss Revolution sales and traditional prepaid calling cards, as well as due to a product mix as lower margin wholesale carrier sale declined.

IDT's total SG&A expense in the second quarter totaled $51.6 million, a 2.4% increase compared to the year ago quarter but 0.5% decrease compared to the prior quarter. TPS's SG&A expense increased 8.9% year-over-year and 1.5% sequentially. As in prior quarters, the increase primarily reflects higher compensation and commission costs, resulting from our build-out of an internal retail sales force in the United States. We expect that this trend will continue at least through the remainder of the year. The direct sales force has been instrumental on expanding our retail footprint into areas underserved by our traditional network of distributors. In addition, to support the rapid growth of Boss Revolution, we increased our marketing and advertising budgets relative to the prior year.

IDT generated $6.4 million in adjusted EBITDA, a 14.6% decline year-over-year, but a strong 38.5% increase sequentially. TPS contributed $8.4 million in adjusted EBITDA, a 19.8% decline year-over-year and 8.6% increase sequentially. Our corporate EBITDA burn in the second quarter was $3.2 million, consistent with our projected annual run rate of $12 million to $15 million.

Depreciation and amortization expense was $4.2 million for the second quarter, with all the $600,000 generated by the TPS segment. TPS's G&A expense decreased 23.7% year-over-year and 5.1% sequentially, reflecting the lower levels of CapEx required since we replaced our TDM network switches with VOIP soft switches. We anticipate that it will continue to decline compared to last year's levels, albeit more slowly for the remainder of the year.

Income from operations in the quarter was $4 million, benefiting from $1.8 million and other gains, reflecting the settlements of a claim filed by IDT after a former cable telephony client unilaterally terminated its agreement with us after going through bankruptcy.

Total net interest expense was $1.4 million, which includes interest on the mortgages on the building at 520 Broad Street, and interest repaid on tax settlements. Our benefit from income taxes totaled approximately $700,000 for the second quarter.

Net income attributable to IDT was $2.7 million or $0.12 per diluted share compared to $3.9 million in the year-ago quarter and a net loss of $4.3 million in the first quarter. Diluted earnings per share were $0.12 compared to $0.18 in the year-ago quarter.

In response to requests from our investors and in the change from prior periods, we're reporting non-GAAP net income and non-GAAP EPS this quarter and plan to do so going forward in an effort to give our investors a clearer picture of the underlying profitability of our businesses.

IDT's non-GAAP net income and non-GAAP EPS exclude depreciation and amortization, severance and other charges, other operating gains or losses, stock-based compensation and income or loss from discontinued operations.

Non-GAAP net income in the quarter was $6.2 million compared to $7.3 million in the year-ago quarter and $8.3 million in the prior quarter. Non-GAAP EPS per diluted share was $0.29 in the second quarter compared to $0.33 in the year-ago quarter and $0.37 in the prior quarter. Please review our earnings release for an explanation of these non-GAAP measures and reconciliations to GAAP measures.

Finally, I want to point out that we had a strong quarter from a cash generation perspective. Net cash provided by operating activities was $19.9 million. Removing the $1.8 million in cash received from the legal settlement, the resulting $18.1 million in cash generated this quarter compares favorably with normalized results in recent quarters.

To sum up, we had a quarter highlighted by several encouraging trends, notably the improved margins in gross profit in our TPS segment quarter-over-quarter. Notwithstanding a continued tough competitive environment, we continue to invest in the long-term development of our businesses, particularly in further developing and expanding the scope of our offerings on our Boss Revolution platform and our retail distribution network. In the long term, these are the keys to growing the telecoms side of our business.

That concludes the prepared remarks. Now I'm going to turn the call back over to the operator to begin the question-and-answer period.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jay Srivatsa of Chardan Capital Markets.

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

Relating to the top line, it appears despite increasing the minutes because of pricing, your top line's been impacted a little bit. What's your outlook in terms of pricing stability as you look at the next quarter, and what are your expectations from the top line?

Samuel Jonas

I don't think we see a dramatic change in the top line one way or the other for next quarter. Most of the impact on this past quarter was a one-time rate decrease to a particular country, and that really affected our revenues. We don't see anything like that coming this particular quarter.

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

Okay, okay. In terms of Boss Revolution, can you speak to how many stores have you been able to install that and what's your outlook as you look at the rest of the year in terms of growth in the number of stores?

Samuel Jonas

We don't give specifics on store counts with Boss Revolution, but we are seeing considerable growth.

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

Well, maybe I'll rephrase the question. What is your revenue expectation for Boss Revolution for the rest of the year?

Marcelo Fischer

We expect it to continue to grow significantly, some of it made up of new products, which we're adding. And we continue to see penetration with our traditional PIN-less dialing service as well.

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

Okay. In terms of cash, can you speak to outside of the dividend increase which is commendable, what are some of your plans related to your cash position?

Howard S. Jonas

We're working on a acquisition now, and if it goes through, we'll be happy to announce it.

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

All right. Last question on the gross margin profile. Looks like you've had a nice bump in margins despite the price pressure. What is your outlook for the year in terms of your ability to either be able to sustain it or possibly improve it?

Samuel Jonas

I would say overall that we expect it to increase, again, not dramatically, but we do expect our overall margin to continue to increase.

Operator

[Operator Instructions] Having no further questions, this concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.

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