IDT Corporation — Fiscal 2019 Third-Quarter 10-Q
Reporting period: Three and nine months ended April 30, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Fiscal 2019 ends July 31.
Business context
IDT operates two reportable segments: Telecom & Payment Services, including retail calling, wholesale carrier services and payment offerings; and net2phone, including cloud communications, SIP trunking and cable telephony. Telecom & Payment Services remained the large majority of revenue. The filing compares 2019 results under ASC 606 with prior-year results that were not restated and remain under the prior revenue standard.
Key financial metrics
| Metric | Three months ended April 30, 2019 | Three months ended April 30, 2018 | Nine months ended April 30, 2019 | Nine months ended April 30, 2018 |
|---|---|---|---|---|
| Revenue | $341.3 | $365.4 | $1,053.0 | $1,154.8 |
| Operating income (loss) | $2.7 | $(1.7) | $5.6 | $(2.1) |
| Net income (loss) attributable to IDT | $3.9 | $(3.5) | $2.6 | $(4.0) |
| Basic and diluted EPS | $0.15 | $(0.14) | $0.10 | $(0.16) |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $47.4 | $1.1 |
| Capital expenditures | Not presented for the quarter | Not presented for the quarter | $13.7 | $16.0 |
Third-quarter operating margin was approximately 0.8%, versus approximately negative 0.5% a year earlier; nine-month operating margin was approximately 0.5%, versus approximately negative 0.2%. Direct costs of revenue were $282.8 million for the quarter and $878.7 million for the nine months. Revenue less direct costs, before depreciation and amortization, was approximately 17.1% and 16.6% of revenue, respectively.
At April 30, 2019, total assets were $419.9 million, current assets $346.4 million, current liabilities $362.3 million, and equity $56.4 million. The resulting working-capital deficit was $15.9 million. Cash and cash equivalents were $79.3 million; restricted cash was $162.8 million, including $162.5 million held by the Gibraltar-based bank. A further $19.8 million of cash held by IDT Payment Services was described as unavailable for other purposes. Cash, cash equivalents and debt securities totaled $79.6 million. IDT had no balance drawn on its $25 million revolving facility at April 30; the facility matured July 15, 2019. The filing reports no other funded debt balance.
Material changes versus the prior comparable period
- Quarterly revenue declined 6.6%; nine-month revenue declined 8.8%. Carrier Services revenue fell 15.1% for the quarter and 18.9% for the nine months, while Boss Revolution Calling declined 7.1% and 6.9%, respectively.
- Mobile Top-Up revenue grew 8.1% for the quarter and 5.9% for the nine months. net2phone revenue increased 36.7% in both periods; UCaaS revenue increased 79.6% for the quarter and 87.3% for the nine months.
- Telecom & Payment Services operating income increased to $6.6 million for the quarter and $18.1 million for the nine months. net2phone operating losses widened to $1.3 million and $4.7 million, respectively, amid higher selling and marketing costs.
- Operating cash flow rose to $47.4 million from $1.1 million, with collections driving a reduction in receivables and customer deposits at the Gibraltar bank increasing by $33.1 million.
- The company acquired Canadian UCaaS provider Versature in September 2018 for $5.9 million cash ($5.5 million net of cash acquired). Its post-acquisition revenue was $1.4 million for the quarter and $3.5 million for the nine months.
Outlook, commentary, risks and unusual items
- Management expected cash from operations and cash, cash equivalents and marketable securities on hand to cover anticipated working capital and capital needs for the 12 months ending April 30, 2020. Expected capital expenditures for that period were $18 million to $20 million.
- Management said traditional international calling faces persistent competition from unlimited wireless plans and over-the-top services. Carrier Services revenue and minutes may fluctuate as the company prioritizes economics over volume. Growth priorities include money transfer, National Retail Solutions point-of-sale services, mobile top-up and net2phone UCaaS.
- At April 30, commitments included $45.1 million of purchase commitments, primarily telecom services commitments, and $17.3 million of operating lease payments. Performance bonds totaled $16.1 million. Accrued expenses included $44.5 million for regulatory fees, including amounts under a Universal Service Administrative Company audit.
- Several putative class actions and other legal matters remain unresolved; the company said it could not estimate potential liability for the described claims. The Straight Path stockholder litigation continued after the Delaware Supreme Court affirmed denial of a motion to dismiss. The FCC also could pursue penalties related to an investigation of former subsidiary Straight Path Spectrum.
- The proposed sale of IDT Financial Services Holding was no longer considered probable to close within 12 months and the business was reclassified as held and used. Brexit uncertainty is a stated risk: IDTFS’s Gibraltar license passporting rights into EU markets could cease, and the company was seeking an EU e-money license.
- ASC 606 adoption reduced opening deferred revenue by $8.6 million. The company also recorded an $0.8 million tax-effect correction and a $1.3 million adjustment for contract acquisition and fulfillment costs. These accounting changes affect comparability with prior-year results.
- The company recorded a $0.6 million quarterly unrealized gain on an equity investment, contributing to other income. It also sold 2.55 million treasury Class B shares to Chairman Howard S. Jonas for approximately $14.8 million, and repurchased 729,110 Class B shares under its repurchase program for $3.9 million during the nine months.
- Management expected adoption of lease accounting standard ASC 842 on August 1, 2019 to add approximately $12.9 million of operating lease liabilities and corresponding right-of-use assets, with an immaterial income-statement impact. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the recovery in operating cash flow is sustainable, particularly given reliance on working-capital movements and restricted or otherwise unavailable cash.
- Whether continuing declines in calling and Carrier Services are offset by growth in mobile top-up, money transfer, National Retail Solutions and net2phone, and whether net2phone can improve profitability.
- The status and potential financial exposure of the regulatory-fee audit, telecom purchase commitments, litigation, FCC inquiry and performance bonds.
- Whether IDTFS obtains the required EU authorization and how Brexit affects its ability to serve customers and any potential sale of the business.
- The final impact of ASC 606 estimates and ASC 842 adoption, and the maturity or replacement of the revolving credit facility after July 15, 2019.