IDT Corporation — Fiscal 2018 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended April 30, 2018; fiscal year ends July 31. Amounts below are in millions of dollars unless otherwise stated. The interim statements are unaudited.
Business context
IDT operates primarily in telecommunications and payment services. Its reportable segments are Telecom & Payment Services and net2phone-UCaaS. On March 26, 2018, IDT completed the pro rata spin-off of Rafael Holdings, which held commercial real estate and pharmaceutical interests; Rafael’s results were not presented as discontinued operations.
Financial results and liquidity
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $365.4 | $370.0 | $1,154.8 | $1,106.7 |
| Gross profit / gross margin | $58.2 / 15.9% | $55.3 / 15.0% | $173.9 / 15.1% | $168.1 / 15.2% |
| Operating loss | $(1.7) | $(6.5) | $(2.1) | $1.8 |
| Net loss attributable to IDT | $(3.5) | $(4.8) | $(4.0) | Net income $18.0 |
| Basic loss / earnings per share | $(0.14) | $(0.21) | $(0.16) | $0.79 |
| Operating cash flow | Not separately presented for quarter | Not separately presented for quarter | $(15.4) | $0.5 |
Quarterly revenue declined 1.3% year over year, while nine-month revenue increased 4.3%. For the quarter, Telecom & Payment Services revenue fell 1.6% to $356.4 million; net2phone-UCaaS revenue rose 22.7% to $9.1 million but its operating loss widened to $0.8 million. Within Telecom & Payment Services, nine-month Payment Services revenue grew 16.0% and Wholesale Carrier Services grew 10.4%; Retail Communications declined 6.4%. Consolidated gross margin improved in the quarter but was slightly lower for the nine-month period.
At April 30, 2018, cash and cash equivalents were $50.2 million, marketable securities $10.6 million, and working capital was negative $45.2 million. Cash-flow statement ending cash, including cash held for sale, was $57.0 million. Cash, cash equivalents and marketable securities totaled $60.7 million; $9.4 million of cash held by IDT Payment Services was substantially restricted. Total assets were $387.9 million and equity $26.9 million. No borrowings were outstanding at period-end under the $25 million revolving facility, which matures January 31, 2020. IDT borrowed and repaid $22.1 million under the facility during the nine months.
Nine-month investing cash use was $1.5 million and financing cash use was $22.0 million, including $11.7 million of dividends. Capital expenditures were $16.0 million. Management stated that cash from operations and available cash, cash equivalents and marketable securities were expected to cover anticipated working-capital and capital-expenditure needs for the twelve months ending April 30, 2019.
Material changes, outlook and risks
- The Rafael spin-off removed $114.9 million of net equity from the consolidated balance sheet, including $105.6 million of net assets excluding cash; IDT also deconsolidated $9.3 million of cash. The spin-off contributed to a substantial reduction in reported assets and equity.
- The nine-month comparison was affected by a $16.6 million tax benefit recognized in FY2017 for previously reserved Netherlands deferred tax assets. In FY2018, IDT recorded a $3.3 million tax benefit for an anticipated refundable AMT credit; accounting for the Tax Act remained incomplete at April 30.
- Following the spin-off, IDT began a restructuring expected to reduce its global workforce by approximately 11% from the January 31, 2018 level. It recorded $3.7 million of Q3 severance expense, with $3.2 million accrued at quarter-end.
- Management expected capital expenditures of $19–$21 million for the twelve months ending April 30, 2019. The board reduced the quarterly dividend from $0.19 to $0.09 per share for the second and third quarters, citing investment needs and the spin-off’s effect on the balance sheet. A $0.09 dividend was declared for payment in June 2018.
- IDT Financial Services Holding remained classified as held for sale, pending regulatory approval and other conditions. The proposed price included approximately $4.0 million plus net assets, valued at $14.3 million at April 30; the filing cautions that completion is not assured.
- Purchase commitments totaled $87.4 million, including $85.6 million under a reciprocal services agreement with a Central American telecom operator. IDT had deposited $9.2 million into escrow under that agreement. Outstanding performance bonds totaled $15.8 million.
- Accrued expenses included $39.4 million for regulatory fees subject to an audit. New claims included two putative class actions alleging calling and messaging violations and a Sprint patent-infringement suit; IDT said it could not estimate potential liability and intended to defend the matters. The FCC could also pursue penalties related to former subsidiary Straight Path’s spectrum licenses.
- After quarter-end, Howard S. Jonas paid $1.5 million toward a proposed $15 million purchase of 2,546,689 Class B shares at $5.89 per share. The arrangement requires stockholder approval before shares are issued.
- Management cited ongoing declines in traditional calling services amid unlimited wireless plans and online voice and messaging alternatives. Growth initiatives included Boss Revolution Mobile, payment services and international expansion of net2phone-UCaaS. No quantified revenue or earnings guidance was provided.
Most important facts for investors to verify
- Whether IDT can sustain operating cash generation and meet obligations given the working-capital deficit, restricted cash and significant purchase commitments.
- Progress and final proceeds from the IDT Financial Services sale, including regulatory approval and net-asset purchase-price adjustments.
- Whether growth in Payment Services and net2phone-UCaaS can offset continuing Retail Communications weakness and pressure on consolidated profitability.
- Final severance costs and the operating impact of the planned workforce reduction; also whether the stated capital-expenditure outlook is maintained.
- Developments in the regulatory-fee audit, litigation and FCC exposure, and any related change in recorded liabilities or cash requirements.
- Stockholder approval and completion of the proposed Jonas share purchase, and the resulting share-count and governance implications.