IDT Corporation — Q3 FY2016 Form 10-Q
Reporting period: Quarter and nine months ended April 30, 2016. Amounts are U.S. dollars; financial statement figures are in millions unless otherwise noted. The quarter is not necessarily indicative of full-year results.
Business context
IDT is a multinational holding company whose principal operations are telecommunications and payment services. Its reportable segments are Telecom Platform Services and Consumer Phone Services. The “All Other” category included Zedge during the reported period.
Financial results and liquidity
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $355.2 | $383.9 | $1,128.2 | $1,191.0 |
| Income from operations | $5.7 | $2.5 | $20.0 | $85.8 |
| Net income attributable to IDT | $4.2 | $0.6 | $12.5 | $83.2 |
| Diluted EPS | $0.19 | $0.02 | $0.55 | $3.58 |
- Quarterly direct costs were $293.2 million, giving gross profit of approximately $61.9 million and a gross margin of 17.4%, versus approximately $67.4 million and 17.6% a year earlier. Operating margin was approximately 1.6% versus 0.6%.
- Nine-month operating income and net income fell sharply year over year chiefly because FY2015 included a $76.9 million gain on the Fabrix sale; the comparable FY2016 gain was $1.1 million. Excluding this difference, reported totals are not directly comparable.
- Cash and cash equivalents were $101.1 million, restricted cash $99.8 million, and marketable securities $46.6 million at April 30. Management reported $147.8 million of cash, cash equivalents and marketable securities, and working capital of $1.4 million.
- Nine-month operating cash flow was $35.8 million, compared with $27.8 million. Investing cash use was $16.0 million and financing cash use was $25.7 million. Cash declined $9.2 million to $101.1 million.
- No borrowings were outstanding under IDT Telecom’s $25 million revolving facility, extended to January 31, 2018; the company reported covenant compliance. The $6.4 million building mortgage was repaid in September 2015. Total liabilities were $337.5 million, including substantial customer deposits; these are not equivalent to funded debt.
- Dividends paid in the nine-month period totaled $13.0 million ($0.56 per share), compared with $43.2 million ($1.85 per share, including special dividends) a year earlier. The board declared a further $0.19-per-share dividend in June 2016. IDT repurchased 398,376 Class B shares for $4.6 million; 8.0 million shares remained authorized for repurchase.
Material changes and operating trends
- Telecom Platform Services revenue decreased 7.6% in the quarter and 5.0% year to date. Retail Communications revenue fell 10.1% and 7.9%, respectively, amid lower calling volumes, Mexico competition and declines in several international markets. Wholesale revenue declined 8.6% and 4.7%, reflecting lower average revenue per minute and waning Latin American arbitrage opportunities.
- Payment Services revenue increased 6.5% in the quarter and 7.3% year to date, supported by airtime top-up and money transfer. Hosted Platform Solutions revenue decreased 20.1% and 21.0%. Consumer Phone Services revenue fell 19.8% and 20.7%; management said it continues to operate this business in “harvest mode.”
- Telecom Platform Services operating income rose 12.8% in the quarter and 23.2% year to date, despite lower revenue. Lower selling, general and administrative costs and reduced prior-year severance contributed; depreciation and amortization increased.
- On June 1, 2016, after quarter-end, IDT completed a pro rata Zedge spin-off. The filing says the disposition did not qualify for discontinued-operations accounting. A broader plan to separate the company into IDT Telecom, Zedge and other holdings remained subject to change, approvals and contingencies.
Outlook, risks and contingencies
- Management expected operating cash flow and cash, cash equivalents and marketable securities on hand to be sufficient for anticipated working capital and capital expenditures through April 30, 2017. Expected capital expenditures for that 12-month period were $18–$20 million.
- Management planned a new Boss Revolution app version with peer-to-peer voice calling and instant messaging in the third calendar quarter of 2016. It cited potential growth from geographic expansion of money transfer and adding services to the app, but provided no quantified earnings or revenue guidance.
- Visa’s proposed acquisition of Visa Europe remained subject to regulatory approval and definitive documentation. IDT Financial Services was estimated to receive, subject to adjustment, €4.7 million in cash and €1.6 million in Visa preferred stock under the disclosed first tranche; timing, final terms and receipt were uncertain.
- In the second quarter, IDT experienced several denial-of-service attacks affecting internet telephony and web infrastructure. The company reported limited direct losses and possible lost-revenue opportunities, and said it had found no evidence of data compromise. It warned that future network or cybersecurity incidents could harm operations, customers, finances and reputation.
- A renewed lawsuit alleging breach of a settlement agreement with Tyco was awaiting a court decision. IDT stated that other ordinary-course proceedings were not expected to have a material adverse effect. At April 30, commitments included $1.9 million of purchase commitments, $0.2 million of letters of credit and $13.3 million of performance bonds.
- Foreign-exchange exposure, marketable-security and hedge-fund investment risk, and customer-deposit and restricted-cash requirements remain relevant. Restricted cash primarily supports IDT Financial Services customer deposits and regulatory requirements.
Important facts for investors to verify
- Whether telecom revenue declines—particularly in Retail Communications and Wholesale Carrier Services—continue, and whether Payment Services growth offsets them.
- Underlying profitability excluding the Fabrix sale gains, and the sustainability of operating cash flow and the narrow $1.4 million working-capital surplus.
- Availability of reported liquidity: $99.8 million of restricted cash and $9.1 million of cash held by payment/banking subsidiaries were unavailable for general purposes.
- Completion and financial consequences of the remaining corporate reorganization, the Zedge separation, and the proposed Visa Europe transaction.
- Developments in the Tyco litigation, cybersecurity controls and attacks, and regulatory or licensing requirements for payment and remittance activities.