IDT Corporation — Form 10-Q Summary
Business context and reporting period
Fiscal third quarter ended April 30, 2017; results cover the three and nine months ended that date and are unaudited. IDT is a multinational holding company focused mainly on telecommunications and payments. Its reportable segments are Telecom Platform Services, Unified Communications as a Service (UCaaS), and Consumer Phone Services.
Key financial metrics
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended April 30, 2017 | Nine months ended April 30, 2017 |
|---|---|---|
| Revenue | $370.0 | $1,106.7 |
| Gross profit / gross margin | $55.3 / 15.0% | $168.1 / 15.2% |
| Operating income (loss) | $(6.5) | $1.8 |
| Net income (loss) attributable to IDT | $(4.8); diluted EPS $(0.21) | $18.0; diluted EPS $0.78 |
| Cash from operating activities | Not presented for the quarter | $0.5 |
For the nine months, cash used in investing activities was $35.3 million and cash used in financing activities was $3.0 million. Cash and cash equivalents were $71.5 million at April 30, down from $109.5 million at July 31, 2016. Restricted cash was $93.3 million and marketable securities were $60.8 million. Management reported $132.3 million of cash, cash equivalents and marketable securities, and a $5.6 million working-capital deficit; some cash is restricted or unavailable for general use.
Total assets were $484.8 million and total liabilities $334.3 million. The company had no borrowings under its $25 million revolving credit facility, which matures April 30, 2018, and reported compliance with its covenants. It paid $13.2 million in dividends during the nine-month period; dividends declared were $0.19 per share for the third quarter.
Material changes versus the prior comparable period
- Quarterly revenue increased 4.2% from $355.2 million, while nine-month revenue declined 1.9% from $1,128.2 million.
- Quarterly operating results swung from $5.7 million of income to a $6.5 million loss. A $10.2 million other operating expense, principally a $10.0 million liability recorded for the Straight Path settlement, was a major factor.
- Nine-month net income attributable to IDT rose to $18.0 million from $12.5 million, substantially aided by a $16.6 million tax benefit from recognizing deferred tax assets of a Netherlands subsidiary. Operating income, however, fell to $1.8 million from $20.0 million.
- Nine-month operating cash flow decreased to $0.5 million from $35.8 million. The filing cites working-capital movements, including an $18.9 million cash use from receivables, as significant factors.
- Telecom Platform Services revenue rose 4.8% in the quarter but fell 1.3% over nine months. Retail Communications revenue declined 8.9% and 8.5%, respectively; Wholesale Carrier Services grew 20.6% and 3.0%, while Payment Services grew 9.2% and 9.4%.
- UCaaS revenue increased 19.6% in the quarter and 12.0% over nine months. Consumer Phone Services revenue declined 22.3% and 20.5%, respectively. Zedge had been spun off in June 2016, affecting comparisons for All Other.
Outlook, management commentary, risks and unusual items
- Management expected operating cash flow and cash, cash equivalents and marketable securities on hand to cover anticipated working capital and capital expenditures for the 12 months ending April 30, 2018. Forecast capital expenditures were $21–$23 million for that period.
- The company said it expected Consumer Phone Services’ customer base and revenue to continue declining. Management described competitive pressure and secular industry trends, including unlimited U.S.-to-Mexico calling offers and alternatives to traditional voice and messaging, as weighing on Retail Communications.
- Growth initiatives cited include the Boss Revolution calling and money apps, expansion of Payment Services and National Retail Solutions, and UCaaS product and geographic expansion. The company also expected UCaaS employee compensation to rise to support growth.
- A binding term sheet with Straight Path provides for IDT to pay $16 million, receive Straight Path’s interest in SPIP intellectual property, and give Straight Path stockholders 22% of specified future net proceeds from the patents. IDT planned to transfer its SPIP interest to an entity organized by Chairman Howard S. Jonas for $6 million; that entity would assume the related proceeds obligations. The FCC inquiry could also result in penalties or civil liability; the settlement addresses related potential claims between IDT and Straight Path.
- IDT expects to spin off real estate, its Rafael Pharmaceuticals interests and certain other investments, with cash to be determined, during calendar 2017. The plan remained subject to change, contingencies and final Board approval.
- Rafael exposure included a $10 million convertible note bearing 3.5% interest and warrants; IDT stated its maximum exposure to loss was its $10 million investment. Rafael is a clinical-stage company, and investment outcomes are uncertain.
- Subsequent events included a June 2017 sale of 1 million Class B shares to Howard S. Jonas for $14.93 million and a May grant of options to him to purchase up to 1 million shares. The option grant was subject to stockholder ratification and had estimated fair value of $3.3 million.
- Other identified exposures include $14.0 million of performance bonds, $3.1 million of purchase commitments, an appeal in the Tyco litigation, and possible tax consequences if foreign earnings are repatriated. Management reported no material change in previously disclosed risk factors and concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether operating cash generation improves, given nine-month operating cash flow of only $0.5 million and the increase in receivables.
- How much of reported cash and liquidity is accessible for corporate purposes, considering restricted balances, customer deposits and cash unavailable for other use.
- The final settlement and transfer terms for Straight Path and SPIP, including the $16 million payment, $6 million transfer consideration and contingent patent proceeds.
- The sustainability of reported nine-month earnings after excluding the $16.6 million deferred-tax benefit and considering the decline in operating income.
- Performance of Retail Communications against ongoing competition, and whether growth in Wholesale Carrier Services, Payment Services and UCaaS offsets declines elsewhere.
- Final approvals and execution of the proposed 2017 spin-off, as well as related-party share sales and the Chairman’s option grant and ratification.