IDT Corporation — Fiscal 2018 First Quarter
Reporting period: Three months ended October 31, 2017. IDT is a multinational holding company focused primarily on telecommunications and payment services. Results are unaudited; the company cautions that quarterly results are not necessarily indicative of the full fiscal year.
Financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $393.6 million | $369.2 million |
| Gross profit, based on revenue less direct costs | $57.0 million; 14.5% margin | $56.1 million; 15.2% margin |
| Operating income | $0.1 million | $5.2 million |
| Net income (loss) attributable to IDT | $(2.1) million | $21.9 million |
| Basic and diluted EPS | $(0.08) | $0.97 basic; $0.96 diluted |
| Cash from (used in) operations | $(30.5) million | $5.5 million |
- Revenue increased 6.6%, while direct costs rose faster, reducing gross margin. Operating margin fell to approximately 0.02% from 1.4%.
- Telecom Platform Services revenue rose 6.5% to $385.1 million, but operating income declined 30.3% to $4.6 million. net2phone-UCaaS revenue rose 9.1% to $7.8 million, while its operating loss widened to $0.7 million.
- Cash and cash equivalents were $52.8 million and marketable securities $54.3 million at quarter-end. Management reported $107.0 million combined and working capital of $4.0 million. Cash flow from operations was pressured by receivables, prepaid and other assets, lower customer deposits, and payments including $10 million under the Straight Path settlement and an $11.75 million escrow deposit.
- Capital expenditures were $5.3 million; management expected $21–$23 million for the 12 months ending October 31, 2018. Dividends paid were $4.7 million, or $0.19 per share.
- No revolving-credit borrowings were outstanding. IDT Telecom had access to a $25 million secured facility, maturing April 30, 2018, subject to covenants. The filing reports no other outstanding debt balance.
Material changes and unusual items
- Wholesale Carrier Services revenue increased 19.0% and minutes 20.0%; Payment Services revenue increased 14.6%. Retail Communications revenue declined 7.8%, with calling minutes down 19.5%, reflecting competition and continued declines in traditional calling products.
- Other expense was $0.8 million versus $2.4 million of other income in the prior-year quarter, mainly reflecting a $0.7 million foreign-currency transaction loss versus a $2.1 million gain.
- The prior-year quarter included a $16.6 million tax benefit from recognizing deferred tax assets. This makes the year-over-year net-income comparison unusually favorable to the prior period. Current-quarter severance was $0.4 million; legal fees related to the Straight Path stockholder litigation were $0.8 million.
- The company accrued $39.9 million for Universal Service Fund regulatory fees at October 31, 2017, versus $43.5 million at July 31, 2017. The underlying review and disputes remain unresolved; additional interest or penalties may apply.
Outlook, risks and contingencies
- Management expected cash from operations and cash, cash equivalents and marketable securities to meet anticipated working-capital and capital-expenditure needs for the following 12 months. This assessment should be considered alongside the quarter’s operating cash outflow and low working capital.
- IDT planned to spin off Rafael Holdings, which would hold specified real estate and pharmaceutical interests and receive a planned $50–$60 million cash contribution. Completion remained subject to Board approval, a favorable tax opinion and SEC registration effectiveness; the Board could amend or abandon the transaction.
- A pending sale of IDT Financial Services Holding Limited was expected to close in the first quarter of calendar 2018, subject to regulatory approval and other conditions. Consideration was approximately $3.8 million plus net asset value, reported as $13.9 million at October 31, subject to adjustments; completion was not assured.
- Purchase commitments totaled $60.9 million, including commitments under a new Central American telecom services agreement. Outstanding performance bonds totaled $15.1 million. The company also identified investment-value, foreign-currency, regulatory, litigation and execution risks.
- The Straight Path settlement involved a $16 million cash payment and mutual releases; the company subsequently sold its majority interest in the related IP holding company for $6 million to an entity owned by Howard Jonas, which assumed certain funding obligations. A separate Straight Path stockholder action was stayed pending the Verizon transaction closing. The company also awaited a decision on its appeal in a long-running Tyco dispute.
- No material changes to previously disclosed risk factors were reported. Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting. No formal earnings guidance was provided.
Important facts for investors to verify
- Whether operating cash flow improves and the $4.0 million working-capital position remains adequate, considering restricted or otherwise unavailable cash.
- Progress and final terms of the Rafael Holdings spin-off, including its cash contribution, tax treatment and the transfer of the contingent Rafael Pharma share right to Howard Jonas.
- Completion and final proceeds of the IDT Financial Services sale, including regulatory approval and customer-asset adjustments.
- Resolution and potential cash exposure from the Universal Service Fund fee dispute, FCC matters, and outstanding litigation or indemnification claims.
- Whether telecom revenue growth, particularly in wholesale and payment services, can offset continuing declines in retail calling and support improved operating margins.