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Executives

Samuel Jonas - Chief Operating Officer

Howard S. Jonas - Founder, Chairman of The Board, Chief Executive Officer and Chairman of Nominating Committee

Marcelo Fischer - Senior Vice President of Finance

IDT (IDT) Q4 2012 Earnings Call September 27, 2012 6:00 PM ET

Operator

Good morning and welcome to the IDT Corporation Fourth Quarter and Full Year 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-month and 12-month period ended July 31, 2012.

Any forward-looking statements made during this conference call, either in the prepared remarks and in the Q&A sessions, is 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.

The 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 the Form 8-K with the SEC.

Finally, please note that this event is being recorded.

I would 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. In the fourth quarter of fiscal 2012, we again delivered strong year-over-year revenue growth. Revenues increased 6.6% to $384.9 million, while our gross margin declined 60 basis points to 15.8%. Those 2 factors netted out to a slight increase in gross profit to $60.9 million. The fourth quarter's SG&A, relatively flat year-over-year, the result was an increase in EBITDA to $6.4 million in the quarter, compared to $4.8 million in the fourth quarter of last year.

Our TPS segment has generated between $36 million and $37 million a year in adjusted EBITDA for the past 2 years.

Looking ahead to fiscal 2013, we expect to do as well, if not better. Our CPS segment, which is in harvest mode, generated $4 million in adjusted EBITDA in fiscal 2012 and we expect it to contribute approximately $3 million in adjusted EBITDA in fiscal 2013.

This year, we invested a little over $2 million to grow the businesses in the all other segment, mostly in the form of additional R&D and other SG&A costs.

We expect to continue investing in the growth of these breakout opportunities during fiscal 2013. Our corporate G&A run rate is approximately $13 million a year, and CapEx is likely to be between $10 million and $11 million in 2013.

Finally, we are returning approximately $15 million a year in dividend to shareholders at the current dividend rate of $0.60 per share a year.

Now, let's look at some of the key drivers behind the results and how we are working to exploit the opportunities we see in our businesses.

The TPS segment within IDT Telecom generates 98% of IDT's total revenue. TPS results this quarter were consistent with recent quarter results. We continue to grow revenue strongly year-over-year. Revenues generated by our Retail Communications vertical were historically driven by the sale of traditional disposable calling cards. The sales of Boss Revolution are playing a role. Revenues from our wholesale termination business which carries international long-distance traffic from telecoms and call aggregators around the globe have also been trending higher. And within the payment services vertical, we're growing sales of international mobile top-up products, which we distribute and sell for overseas wireless carriers.

While these changes in our product mix have delivered revenue growth, it also lowered consolidated TPS's gross margin, which has been trending downwards for years. The relatively higher margin prepaid calling card revenues are being supplanted by the rapid growth of these lower-margin services.

Decline in gross margin has slowed recently. Our Wholesale Carrier business has strategically and gradually targeted its growth to more profitable routes. Within our Retail Communications vertical, sales of higher-margin prepaid calling cards are declining at a slower rate. As a result, TPS's gross margin has been relatively stable over the past 6 quarters, declining by 80 basis points net.

In the fourth quarter, TPS's gross margin actually increased sequentially by 30 basis points.

Gross profit dollars increased nicely this quarter. In fact, GP has grown slowly in the past 2 years as a healthy increases in revenue have more than outpaced the incremental declines in gross margins. We continue to view GP dollar trends as one of the key metrics in measuring success and we hope and expect continued increases in GP throughout fiscal 2013.

SG&A expense, although down year-over-year, increased sequentially and we expect that it will continue to increase in fiscal 2013 at moderate levels as we invest in several crucially important long-term TPS growth initiatives. This include development of new value-added services for our Wholesale Carrier business customers, expansion of IDT's retail sales force here in the U.S., development of new payment and remittance services and expansion of Boss Revolution in both Europe and Asia. In fact, we launched Boss in U.K. earlier this year, and after the close of the fiscal year, we went live in Germany and Spain. Before the end of the calendar year, we expect to have launched in Hong Kong, Australia and Singapore. However, we don't expect that the Boss Revolution will have the same growth trajectory overseas that we have enjoyed in the U.S. In general, the competitive landscape in Europe and Asia are not as favorable since many already have strong entrenched incumbents.

The upside of all these investments is that increases in our SG&A expense will likely offset most of the increases in that gross profit we hope to achieve in fiscal 2013. That will leave us with similar or slightly increasing levels of adjusted EBITDA in both TPS and IDT in fiscal 2013 compared to fiscal 2012.

IDT begins 2013 on a solid footing. We are fundamentally healthy and stable, and we are in a position where we can invest significantly in our long-term growth, while at the same time, continuing to return a large majority of our free cash flow to our investors in the form of recurring dividends and occasional share repurchases.

Our positive outlook -- our positive outlook contrasts sharply with some of our formers competitors in the traditional prepaid calling card business. Particularly in the U.S., several of the companies that once challenged us for dominance of the traditional prepaid calling card market have fallen by the wayside.

Earlier this month, the Vivaro, which we once considered to be our largest competitor in the U.S. along with all of its subsidiaries, including STi Prepaid and Epana Networks and Kare Distribution filed for bankruptcy [ph] protection. In its court filings, Vivaro disclosed that its revenues had decreased by 40% since the fourth quarter of 2010. In contrast, revenues of our TPS segment increased by over 26% in the past 2 years. We at IDT attribute our relative success to 3 factors: First, we have a dynamic and thriving carrier group that works tirelessly in coordination with our retail businesses to keep our costs competitively low. This makes it very difficult for our retail competitors to undercut our prices for international long-distance calls in most destinations and still make a profit; second, we foresaw the decline in traditional disposable calling cards coming and responded by developing innovative, alternative sources of revenue and got them to market ahead of the competition; and third, we have a talented and dedicated group of employees throughout the company who routinely outperform in sales, technology and operations and continue to keep us a step ahead of our competitors.

We have a great deal of work ahead of us to develop enormous potential within our TPS segment. My colleague, Bill Pereira, the CEO of IDT Telecom, together with his management team are focused and committed on executing to transform this potential into reality over the coming years.

Today, I also want to briefly update you on 3 other businesses that are often overlooked, beginning with our Fabrix business. Fabrix continues to make great strides and it has the most efficient, most dynamic cloud-based video storage solution in the industry. The Fabrix platform enables groundbreaking services such as cloud-based DVR that supports the consumer demand for content any time, anywhere on any device. Fabrix customers are also leveraging the Fabrix storage platform as master video libraries and origin servers for content distribution. In addition to media-centric applications, Fabrix integrated storage and computed platform is also getting a lot of customer interest for non-video applications, including as a platform for big data analytics as well as virtualization.

Many of you know that Fabrix's software is powering a cloud-based DVR system for a major U.S. cable operator. The cloud DVR system is now functioning beautifully in over 350,000 homes and we expect it to be operating in over 1 million homes by the end of calendar 2013. The success of this deployment has created a host of opportunities for Fabrix and its system integrated ERP [ph] partners.

In a multitude of laboratory trials and various operators, the Fabrix solution has proven its technical superiority and versatility. On the close of the fiscal year, Fabrix collected $12 million from a system integrator for additional services, including storage and video-on-demand applications. This cash will be recognized as revenue over 3 years muting its short-term impact on our bottom line. Fabrix is actively marketing to potential customers in North America, Europe and Asia. The Fabrix team, mostly engineers, is based out of Israel and is extremely capable and intensely focused. As other major cable and system operators move towards decisions regarding their deep storage and processing systems later this year, we hope to have much more exciting news for you.

Zedge, our recommendation platform that includes a mobile app that allows users to share and obtain content to personalize their mobile phones and tablets, just surpassed 40 million installations of its Android app, which is a remarkable achievement. Zedge's recently launched game channel is off to a great start. Through that channel, Zedge now provides its users with personalized game recommendations and is already generating more than 10 million game downloads per month. The channel has gone over very well with some of the leading mobile game publishers that provided us with enthusiastic feedback about the high-value customers that Zedge brings to them. We expect games to become a major driver of the value for Zedge.

We continue to work on monetizing our IP. The patent asset portfolio held by our wholly-owned subsidiary, ICTI, our goal is to strike the right balance between maximizing the value that we can realize for our shareholders from these IP assets while minimizing risks. We are hard at work and will keep you updated on our progress.

Finally, it is worth noting that during 2012, we resolved many legal cases with significant downside potential for IDT. We begin fiscal 2013 in a much stronger position as a result. All in all, this year promises to be very exciting as we pursue excellent opportunities for growth. Thank you for your continued interest in IDT.

Now, Marcelo Fischer, IDT's Senior Vice President of finance, and I will take your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] The first question today comes from Jay Srivatsa of Chardan Capital Markets.

Unknown Analyst

This is actually Pierce Hewes [ph] from Chardan Capital Markets. Well I've got a couple of first questions but the first one is how much penetration have you had with Boss Revolution products so far?

Howard S. Jonas

What do you mean?

Unknown Analyst

Just in the overall market, how is it -- is it pushing forward or kind of you just expand on kind of its ability to take over the market space?

Howard S. Jonas

It's continuing to grow very nicely, and I think that it will continue to grow very nicely.

Marcelo Fischer

It's Marcelo. We have seen very nice growth on Boss Revolution here in the U.S., both sequentially, as well as versus a year ago. If you look at any type of metric, whether it's number of points of presence, number of active customers, number of transactions or revenue, they're all showing growth of about 15% in Q4 versus Q3, and almost 100% growth year-over-year. So we think that the product is doing very well and will continue to penetrate.

Unknown Analyst

And then also kind of one of you, as you mentioned, one of your key competitor has filed for bankruptcy, when do you expect to see benefit of this?

Howard S. Jonas

I think we've already seen some of the benefit from it, and I think that we'll continue to see some of the benefit from it as things play out.

Unknown Analyst

With them declining, I mean, you said like 40% or so, is it already somewhat priced in? Have you seen most of it or is there going to be any additional benefit in the coming year that's going to make a market difference?

Marcelo Fischer

Yes, I mean, I believe that there is a reason why they went into bankruptcy and the revenues are down by more than 40%. And I think part of that reason is the fact that we, at IDT, have more than doubled our sales in the U.S. over the past 2 years while they were going down. We do believe that probably a good portion of the former customer base had migrated to us, especially as that customer base is looking for the market [ph] information that came via PIN-Less [ph] services, which they do not really offer. So going forward, they really -- they really sell cards, which are like really not clean cards. The most of the cards that they sell [indiscernible] have a lot of fees in them, that's not really a market that we compete. Our cards have no fees. They are clean. Because we have great rates and we are able to drive those great rates because of our buying capacity, which they do not have. So I believe that probably customers aren't interested in cards which have fees, probably those customers will be taken over by some of our competitors who are willing to launch cards at a loss and see if they could turn the market around. We believe that we don’t have to do that, we don't have to lose money in launching cards at a loss to grab that market share. We are executing [ph] a good strategy right now by selling projects at a profit and we'll continue to grow that way.

Unknown Analyst

And then, if you could just comment quickly on the status of the spin-off?

Howard S. Jonas

We don't have an update, at this time, on the status of it.

Unknown Analyst

No problem. And I guess, finally, how do you see the Wholesale Carrier business scaling in next year?

Howard S. Jonas

Can you repeat the question?

Unknown Analyst

How do you see the Wholesale Carrier business scaling up next year?

Marcelo Fischer

Yes, I mean, the Wholesale Carrier business is doing well. I think that we see more and more, in the marketplace, more of a focus on our voice products that offer high-quality termination. More and more of our customers migrating towards our gold and platinum quality offers. And I think that's been driven a lot by the fact that we continue to focus on serving operators that have their own retail traffic and, therefore, they require the highest level of service, and IDT has a good network and we are able to provide quality termination services, and we also -- I think more and more, Wholesale Carriers using more of our customer interactive portals that we have launched and we are developing new features on that, and these portals allow the customers to interact more with our quality management team. It allows them to develop the portals to allow greater degree of capability [ph] of other customers to give them better options in terms of pricing and quality on given routes. So we think that we have providing a good customer service experience to our customers, and we believe that as we try to grow the number of direct connections that we have -- interconnection with both fixed and mobile-operated around the world that will allow us to continue to provide high-quality voice services to them and continue to grow our market share in that space.

Operator

[Operator Instructions] There appears to be no further questions at this time. I'll hand call back over for any closing comments.

Samuel Jonas

Thank you very much. If you have any questions in the coming days, please feel free to e-mail Bill Ulrey and we post them in an additional 8-K. Thank you.

Operator

Ladies and gentlemen, the conference has now concluded. You may disconnect your telephones. Thank you for joining and have a pleasant day. Goodbye.

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