IDT Corporation — Fiscal 2020 Second-Quarter 10-Q
Reporting period: Three and six months ended January 31, 2020. Unless noted otherwise, financial amounts below are U.S. dollars; amounts are rounded to millions. The filing is unaudited.
Business context
IDT operates two reportable segments: Telecom & Payment Services, including BOSS Revolution Calling, Carrier Services, Mobile Top-Up and growth businesses; and net2phone, which provides cloud communications and telephony services. Telecom & Payment Services generated about 96% of first-half revenue.
Financial performance and liquidity
| Metric | Three months ended Jan. 31, 2020 | Prior-year quarter | Six months ended Jan. 31, 2020 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $323.9m | $349.5m | $664.1m | $711.8m |
| Income (loss) from operations | $1.3m | ($0.5m) | ($0.1m) | ($0.3m) |
| Net income (loss) attributable to IDT | $0.9m | ($1.3m) | ($0.6m) | ($3.6m) |
| Basic and diluted EPS | $0.04 | ($0.05) | ($0.02) | ($0.15) |
| Cash from (used in) operating activities | Not separately presented for the quarter | ($23.3m) | $38.0m |
- Quarterly revenue fell 7.3% year over year; first-half revenue fell 6.7%. Quarterly operating income improved to $1.3m, while first-half operations remained slightly loss-making.
- Quarterly direct costs were $262.7m, about 81.1% of revenue, implying an approximately 18.9% gross margin. The prior-year-quarter direct-cost ratio was about 83.3%.
- Telecom & Payment Services revenue declined 8.0% in the quarter and 7.4% year to date, but segment operating income increased to $7.1m and $11.5m, respectively. net2phone revenue grew 12.0% in the quarter and 16.1% year to date, while its operating loss widened to $3.3m and $6.6m, respectively.
- At January 31, 2020, cash and cash equivalents were $61.1m, restricted cash was $172.0m, debt securities were $8.8m and current equity investments were $5.9m. Management reported $75.7m of cash, cash equivalents, debt securities and current equity investments, and a $20.6m working-capital deficit. The filing says $11.5m of cash at IDT Payment Services was unavailable for other purposes; most restricted cash was held by the Gibraltar-based bank.
- Total assets were $439.7m and total liabilities were $386.3m. No amount was outstanding under the $25m revolving credit facility at quarter-end; it matured July 15, 2020 and was secured by primarily all of IDT Telecom’s assets.
- Cash, cash equivalents and restricted cash together decreased $24.1m in the first half, to $233.1m. The decrease included $23.3m of operating cash use and $14.4m of investing cash use, partly offset by $14.2m from exchange-rate changes. Operating cash flow included a $20.6m decrease in customer deposits at the Gibraltar-based bank.
Material changes and management commentary
- Growth in Mobile Top-Up (up 18.0% in the quarter) and Telecom & Payment Services growth initiatives partly offset declines in BOSS Revolution Calling (down 7.7%) and Carrier Services (down 20.5%). Calling and Carrier minutes of use also declined.
- Management attributed pressure on BOSS Revolution Calling to market-wide growth in unlimited wireless plans and over-the-top calling and messaging. It expects traditional international long-distance services to face longer-term pressure; Carrier Services revenue and usage may fluctuate as the company prioritizes economics over volume.
- Mobile Top-Up benefited from expanded bundled offerings and new mobile partners. BOSS Revolution Money Transfer and National Retail Solutions also grew. net2phone-UCaaS grew, but higher selling, general and administrative costs contributed to net2phone’s increased operating loss.
- Management said cash from operations over the next 12 months, together with the January 31 balance of cash, cash equivalents, debt securities and current equity investments, was expected to cover anticipated working-capital and capital-expenditure needs through January 31, 2021. Expected capital expenditures for that period were $14m–$16m; first-half capital expenditures were $7.7m.
Risks, contingencies and unusual items
- Disclosure controls and procedures were deemed ineffective at January 31, 2020 because of a material weakness in management review controls for non-income-related taxes at a foreign entity. Remediation included employee training, enhanced tax documentation and consideration of outside assistance. Management said additional procedures supported fair presentation of the financial statements.
- Accrued expenses included $41.1m for regulatory fees, including amounts under audit by the Universal Service Administrative Company. The company also disclosed potential exposure to uncollected sales and similar taxes following the Wayfair decision; successful claims could materially affect results or financial position.
- Purchase commitments totaled $52.6m, including $50.5m under telecom-service commitments. Outstanding performance bonds were $17.6m. The company could not estimate potential liability for several legal matters, including a Straight Path-related stockholder action and other putative class actions.
- The filing identified Brexit-related uncertainty, including the risk that IDT Financial Services Limited could lose EU passporting rights after the transition period unless alternative arrangements or an EU e-money license were obtained. It also identified coronavirus-related risks to consumer spending, partners and economic activity.
- In December 2019, net2phone acquired Spain-based Ringsouth for $0.45m cash plus $0.375m of estimated contingent consideration; its operating results were not significant. The filing also recorded severance costs of $1.1m in the first half and continued legal expense related to the Straight Path action, partly offset by insurance proceeds.
- The company corrected prior-year quarterly financial statements for a non-income-related tax accrual, determining the adjustments were not material to those previously issued statements. The correction reduced prior-year-quarter net income by $1.5m and prior-year first-half net income by $2.35m.
Important facts for investors to verify
- Whether revenue declines in Calling and Carrier Services continue, and whether growth in Mobile Top-Up, money transfer, retail solutions and net2phone can offset them.
- Operating cash conversion and movements in customer deposits, especially the extent to which cash balances are restricted or unavailable for general use.
- The status of the $41.1m regulatory-fee accrual and audit, the foreign-tax control remediation, and potential sales-tax exposure.
- Progress toward an EU e-money license or other arrangements for IDT Financial Services Limited, along with developments in Brexit and coronavirus risks.
- Near-term liquidity and the revolving facility’s July 2020 maturity, as well as funding of disclosed purchase commitments and capital expenditures.