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Executives

Samuel Jonas - Chief Operating Officer

Marcelo Fischer - Senior Vice President of Finance

Analysts

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

Michael Salzhauer

IDT (IDT) Q3 2012 Earnings Call June 7, 2012 6:00 PM ET

Operator

Good day, and welcome to the IDT Corporation's Third Quarter Fiscal 2012 Earnings Conference Call. [Operator Instructions] In today's presentation, IDT's Chief Operating Officer, Samuel Jonas, will discuss IDT's financial and operational results for the 3 months ended April 30, 2012.

Any forward-looking statements made during this conference call either in the prepared remarks or in the Q&A session whether general or specific in nature are subject to risks and uncertainties that may cause actual results to differ materially from those, which the 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 or the Q&A, IDT's management may make reference to the non-GAAP measures, adjusted EBITDA, non-GAAP net income and non-GAAP EPS. Schedule provided in the earnings release 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 also been filed on a Form 8-K with the SEC. Finally, please note that this event is being recorded. I'd now like to turn the conference over to IDT's Chief Operating Officer, Samuel Jonas.

Samuel Jonas

Thank you all for joining the call and for your interest in IDT. From a profit and loss perspective, this third quarter was consistent with the positive trend of the past 2 years. We again delivered strong revenue growth, which was balanced against lower margins, leading to consistent levels of gross profit. This quarter, IDT achieved the highest level of gross profit since the fourth quarter of fiscal 2010, while IDT's adjusted EBITDA increased to $7.5 million compared to $5.6 million in the year ago quarter.

Earnings were reduced by accruals taken in connection with 4 legal matters. These charges more than offset the gain we realized from the sales of Spectrum licenses previously announced by IDT Spectrum.

From a cash perspective, we generated net cash from operating activities of $24.4 million in the 3 months ended April 30. We benefited from strong operating results and good working capital management at IDT Telecom, and proceeds from Fabrix's sale of software licenses and maintenance agreements. In addition, we also received cash from our Spectrum license sales. In light of our recent results and business outlook, we will continue to pay a quarterly dividend of $0.15 per share.

Now I want to provide some additional details and color on the results of the Telecom Platform Services segment, or TPS, which generates nearly 98% of our revenue. However, I will try not to replicate the ins and outs of the earnings release, which is available for your review through the IDT website at www.idt.net. We grew TPS's revenue to $372.1 million, an increase of 12.3% year-over-year. Within TPS, Retail Communications revenue increased by 18% year-over-year to $139.5 million. Growth in sales of our pin-less calling service on the Boss Revolution platform more than offset the decline of traditional prepaid calling card revenue.

Our Wholesale Termination Service business grew revenue 10.6% year-over-year to $179.5 million. From the strong revenue growth, TPS increased gross profit to $54.9 million, a 4.9% increase compared to the year ago quarter and the highest level we have achieved since the fourth quarter of fiscal 2009. TPS's gross margin decreased to 14.7%, down 110 basis points year-over-year. The decline primarily reflects the product mix shift within TPS. With our Boss Revolution platform sales and Wholesale Carrier revenues are growing rapidly with relatively lower margins, while revenue from the sale of higher margin and traditional prepaid calling cards continues to decline.

Looking ahead, our goal is to stabilize and then grow TPS's gross margins. TPS generated $9.9 million of adjusted EBITDA during the quarter, the highest in over a year.

TPS's depreciation and amortization expense continued to decline, decreasing to $3.5 million compared to $4.3 million in the year ago quarter. TPS also took a charge of $6.5 million during the third quarter related to 4 legal matters. And the result of these accruals, TPS recorded a loss from operations of approximately $100,000.

The All Other segment generated income from operations of $4.3 million, which includes a gain of $5.3 million resulting from the sale of Spectrum licenses mentioned earlier. Absent that gain, the loss from operations would have been $1 million compared to a loss of $1.7 million in the year ago quarter. Also, corporate overhead continued to decline, falling to $3 million in the third quarter compared to $4.4 million in the year ago quarter.

Company-wide income from operations was $2.2 million and would have been $3.3 million absent non-routine events, being 4 legal matter accruals and the gains from the Spectrum license sale. Net income attributable to IDT for the quarter was $3 million or $0.14 per basic and diluted share. In response to feedback from investors, we have begun to report non-GAAP net income and non-GAAP net income per share. By backing out certain items that we feel do not properly reflect the ongoing performance of our core operating businesses and asset base, we hope to provide you with additional insights into our businesses.

Non-GAAP net income for the quarter was $9.8 million or $0.46 per basic and $0.44 per diluted share. The non-GAAP net income result excludes depreciation and amortization expense of $4.2 million, net other operating losses of $1.1 million and noncash compensation of $1 million.

That concludes my remarks. Marcelo Fischer, our Senior Vice President of Finance and CFO of IDT Telecom, will join me now. We'd be happy to answer any questions you may have. Operator, we're ready for the Q&A. Thank you.

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

Just a quick question on Boss Revolution. In the past, you talked about presence in U.K. and then expanding into Hong Kong and Spain. Can you give us an update on where things are in terms of rolling out Boss Revolution?

Samuel Jonas

Yes. We've already rolled out the U.K. And by the end of the year, we're intending to roll out in 6 more countries.

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

Okay. How has been the reception so far for Boss Revolution? Do you -- in terms of percentage of revenues within TPS, could you give us a sense of how much Boss Revolution was relative to the previous quarter?

Samuel Jonas

You're talking about in general or in foreign countries?

Marcelo Fischer

Jay, it's Marcelo. As you have seen in the past few quarters, Boss Revolution continues to propel the Telecom TPS retail segment and continues to grow quite strongly. As we announced in our earnings release, total Boss Revolution revenues for Q3 continued to grow double digits. The minutes are growing very strongly and it's really driving the growth in the retail segment, and it's the same -- and more than compensating the fact that the traditional calling card business continues to decline. So we're really excited about it. And as Samuel mentioned before, we have just begun to launch that in the U.K. The minutes are growing slowly. That's an investment mode for us. We are putting some investment in marketing, in providing discounts. So at this point, obviously, in the U.K., we are incurring profitability losses as part of our investment plan over there and we hope that turns around over time.

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

Thanks for the clarity on that, Marcelo. But in terms of as a percentage of total minutes, how much is Boss Revolution now relative to what it was last quarter, or in terms of revenue? So either one is good.

Samuel Jonas

We try not to disclose it for competitive reasons, but it's grown quite well. As you said, it's been a double-digit growth.

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

Okay, fair enough. In terms of the prepaid calling card business, you had partnered with Rite Aid and Costco and some of the other drugstore chains. How has that been progressing? Are you in the process of further collaborations or is something backing off?

Marcelo Fischer

No, all the programs seem to do well and a couple more are being turned on hopefully in the next couple of weeks. [indiscernible] because of the [indiscernible] and because the [indiscernible] accounts [indiscernible] of these bought accounts [indiscernible] as we tried to sell more to those accounts, and we had -- haven't [indiscernible] to use it yet from the consumer intake, so we expect to see that down the pipeline.

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

All right. Last question for me. In the past, in the Q3, you tended to have some decline, revenue decline relative to Q2 just by way of the numbers it's laid out over the last few years. This year, you've had a nice growth quarter-over-quarter. Can you tell us what changed to really give you a nice growth?

Samuel Jonas

No, I mean, I think we basically described it already. I mean our Boss product continues to grow and our traditional wholesale business also continues to grow.

Marcelo Fischer

Yes, Jay, I mean you're absolutely correct. Usually, Q3 shows a delta. And this time, it went up because if you'll recall in Q2, we saw a temporary dip in the Wholesale Carrier revenues at the time. Some of it was because of regulatory pricing in some southern -- Latin America countries. We were able to more than compensate for that now during Q3. We've seen -- we saw nice growth in the Wholesale Carrier revenues and we saw also the steady growth in Boss Rev, and that more than compensated the dip that we saw last quarter. And we expect that those 2 businesses, Wholesale Carrier and Boss Rev, continue to propel Telecom growth and revenue growth.

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

All right. Maybe one follow-up on that. Last quarter, you had a little bit of disruption in North Africa that negatively impacted revenue. So has that been sorted out or have you seen the revenues come back in from that region, or is that still influx?

Marcelo Fischer

Yes, I mean the last quarter was not really a disruption. It was really the end of a onetime opportunity that we had for about 2 quarters that related to the situation in Libya. That opportunity ended last quarter with the end of the resurgence in Libya, so we had to work harder to make up for that opportunity that was lost, and I think we delivered that during Q3.

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

All right. You didn't speak much about the Fabrix and Zedge part outside of what's in the press release. Can you give us some highlights on what the status is and how the developments are going over there?

Samuel Jonas

Yes, I mean during the quarter, I mean, Zedge rolled out live wallpapers and games. It's still very early to tell how that's going to affect revenues. Their initial testing is that it's doing pretty well. Fabrix is also doing quite well and they're bringing on more customers, and their current customers are taking more of their product. As we said, we took in $7 million this quarter from Fabrix alone.

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division

All right. Maybe one follow-up related to the Spectrum auction -- the licensing last quarter. Is that something you're going to pursue longer-term to see that -- do you see that as a viable strategy, licensing the Spectrum space that you have?

Samuel Jonas

The answer is yes. I mean, I don't know how quickly it will play out and I don't know if you can gain any insight into the total portfolio value from what we sold to date, but we definitely believe that there'll be future sales, and we hope to see a lot of money from that.

Operator

And the next question comes from Michael Salzhauer of Benjamin Partners.

Michael Salzhauer

You have a lot of cash flow and a lot of cash and a company that I don't think people follow very well. Have you given thought to buying back stock?

Samuel Jonas

We have given it thought. We currently do have authorization to buy back up to 5.4 million shares. And if the price is right, we might.

Michael Salzhauer

But the company is not in the market now?

Samuel Jonas

No, we are not in the market now.

Operator

[Operator Instructions] 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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