IDT Corporation — Form 10-Q Summary
Business context and reporting period
Fiscal second quarter and six months ended January 31, 2021. IDT reports three segments: Fintech (BOSS Revolution Money Transfer and National Retail Solutions), net2phone-UCaaS, and Traditional Communications. Comparative segment data were recast to the new presentation.
Key financial metrics
| Metric | Three months ended Jan. 31, 2021 | Six months ended Jan. 31, 2021 |
|---|---|---|
| Revenue | $339.8 million; +4.9% year over year | $683.2 million; +2.9% |
| Operating income | $12.9 million, versus $1.3 million | $26.2 million, versus an operating loss of $0.1 million |
| Net income attributable to IDT | $13.1 million; diluted EPS $0.51 | $21.4 million; diluted EPS $0.83 |
| Operating cash flow | Not presented separately for the quarter | $25.6 million, versus cash used of $23.3 million |
Quarterly operating margin was approximately 3.8%, compared with 0.4% a year earlier; six-month operating margin was approximately 3.8%, versus approximately breakeven. Direct costs were $269.1 million in the quarter and $542.3 million year to date. Gross margin was approximately 20.8% for the quarter and 20.6% for six months, calculated as revenue less direct costs.
At January 31, 2021, cash and cash equivalents were $79.5 million, restricted cash $109.9 million, debt securities $21.5 million, and current equity investments $24.3 million. Management cited $125.3 million of cash, cash equivalents, debt securities, and current equity investments, and working capital of $15.1 million. The current ratio was approximately 1.05. Restricted cash primarily backs customer deposits at IDT’s Gibraltar-based bank and is not generally available for other purposes; a further $9.8 million held by IDT Payment Services was considered unavailable for other purposes. No borrowings were reported at quarter-end; operating lease liabilities totaled $9.1 million.
Six-month investing cash outflow was $39.1 million, including $8.8 million of capital expenditures, $5.0 million for Rafael securities and a warrant, and net purchases of debt and equity investments. Financing cash outflow was $4.0 million, including $4.2 million of Class B share repurchases. Cash, cash equivalents, and restricted cash declined by $11.9 million.
Material changes and segment performance
- Fintech: Quarterly revenue rose 89.9% to $18.5 million; six-month revenue doubled to $38.6 million. Money-transfer growth was driven mainly by digital transactions; NRS benefited from POS network expansion, payment processing, and advertising. The segment’s operating loss narrowed to $0.2 million for the quarter, and it recorded six-month operating income of $2.9 million.
- net2phone-UCaaS: Revenue grew 35.7% to $10.7 million for the quarter and 34.7% to $20.4 million for six months. Seats served reached 190,000, up 56% year over year. The segment remained loss-making: quarterly operating loss was $3.2 million and six-month loss was $7.1 million.
- Traditional Communications: Quarterly revenue increased 1.4% to $310.5 million, while six-month revenue declined 0.9% to $624.2 million. Mobile Top-Up grew 27.3% for the quarter; BOSS Revolution Calling was roughly flat; Carrier Services fell 14.3%. Operating income rose 73.3% to $18.7 million for the quarter and 88.6% to $34.5 million for six months.
Overall earnings benefited from a $2.0 million gain on the sale of rights in a payment-card antitrust lawsuit, as well as higher foreign-currency transaction gains and investment gains. Revenue growth and improved operating results also reflected lower severance and some lower operating expenses. Six-month foreign currency translation losses were $1.6 million.
Outlook, risks, contingencies, and unusual items
- Management expected operating cash flow and January 31 liquidity resources to cover anticipated working capital and capital needs through January 31, 2022. Expected capital expenditures for that twelve-month period were $18–$20 million. Management cautioned that interim results are not necessarily indicative of the full fiscal year.
- COVID-19 effects were mixed: digital consumer transactions remained stronger, while Carrier Services faced faster structural declines as communications shifted from international voice calling to video and collaboration tools. Management expected Carrier Services revenue and minutes to continue declining. Longer-term unemployment, economic weakness, and foreign-exchange conditions could pressure demand.
- Brexit creates regulatory and operating uncertainty. IDT Financial Services’ Gibraltar bank lost EU passporting rights after the transition period; IDT was seeking an EU e-money license and used third-party arrangements to serve affected customers. The company warned that inability to serve those customers could reduce revenue.
- Material unresolved matters include a Straight Path shareholder class action, with trial scheduled for December 2021, and a USAC audit of FCC filings. IDT said it could not estimate potential liability for the Straight Path matter. The company had been invoiced $4.7 million for certain regulatory fees but said it would not pay unless its appeal is unsuccessful; accrued FCC-related fees were $41.1 million, including amounts for the audit year and other years.
- Potential sales-tax claims following the Wayfair decision and a possible FCC action relating to former subsidiary Straight Path Spectrum were also disclosed. The company stated that successful tax assertions could materially adversely affect results. Outstanding performance bonds were $19.8 million; contractual obligations totaled $12.7 million, excluding performance bonds and uncertain acquisition consideration.
- During the period IDT acquired 51% of a cross-border digital top-up platform for $2.8 million of stated consideration, including contingent consideration. After quarter-end, the seller exercised an option for IDT to buy an additional 5% for $0.3 million. On February 2, 2021, IDT also invested $4.0 million in MarketSpark preferred shares.
- Control and governance considerations include related-party office leases with Rafael Holdings and a dual-class share structure. The filing reported that trusts for Howard S. Jonas’s children held approximately 69.5% of combined voting power as of March 8, 2021. Management reported effective disclosure controls and no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether Fintech and UCaaS growth can improve profitability, particularly given continuing UCaaS operating losses.
- Whether Traditional Communications’ Carrier Services declines and BOSS Revolution Calling’s structural pressures are offset by Mobile Top-Up and digital-channel growth.
- How much of reported earnings growth is repeatable versus attributable to the $2.0 million legal-rights sale, investment gains, and foreign-currency gains.
- How usable liquidity is after separating restricted customer funds and other cash unavailable for general purposes, and whether planned capex remains within guidance.
- Developments and potential financial exposure from the Straight Path litigation, USAC audit and accrued regulatory fees, sales-tax reviews, Brexit-related customer arrangements, and other disclosed proceedings.