IDT Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended July 31, 2016. The filing is an annual report, not a standalone fourth-quarter filing; it also provides unaudited Q4 results for the quarter ended July 31, 2016.
Business context
IDT is a multinational holding company focused primarily on telecommunications and payments. IDT Telecom generated 99.2% of consolidated revenue. Its principal activities are retail international calling, wholesale call termination, payment services and hosted communications platforms. Consumer Phone Services is a declining U.S. residential phone business operated in “harvest mode.” The company completed the Zedge spin-off on June 1, 2016; Zedge’s results were not classified as discontinued operations.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $1,496.3 million | $1,596.8 million |
| Income from operations | $26.2 million | $93.1 million |
| Net income | $25.4 million | $86.1 million |
| Net income attributable to IDT | $23.5 million | $84.5 million |
| Diluted earnings per share | $1.03 | $3.63 |
| Cash provided by operating activities | $49.1 million | $30.5 million |
| Capital expenditures | $18.4 million | $28.6 million |
Consolidated operating margin was approximately 1.8% in FY2016 versus 5.8% in FY2015; direct costs were 83.3% of revenue in FY2016. FY2016 operating income included a $7.5 million gain on the Visa Europe transaction and a $1.1 million Fabrix sale adjustment, while FY2015 included a $76.9 million Fabrix gain. The year-over-year decline in reported profit therefore reflects both lower revenue and the absence of the prior-year Fabrix gain.
- Telecom Platform Services: Revenue fell 6.0% to $1,477.9 million; operating income increased to $31.2 million from $27.0 million, including the Visa Europe gain.
- Retail Communications: Revenue decreased 8.6% to $672.2 million, with lower calling minutes and pressure on U.S.-to-Mexico calling among the cited causes.
- Wholesale Carrier Services: Revenue decreased 6.1% to $555.1 million, reflecting lower revenue per minute and reduced arbitrage opportunities.
- Payment Services: Revenue increased 5.2% to $219.2 million, primarily from airtime top-up and money transfer.
- Hosted Platform Solutions: Revenue declined 18.5% to $31.4 million. Consumer Phone Services revenue declined 20.3% to $6.9 million.
Fourth quarter: Revenue was $368.1 million, operating income $6.2 million, net income $11.4 million, and net income attributable to IDT $11.0 million ($0.49 basic EPS; $0.48 diluted). The quarter included the $7.5 million Visa Europe gain and $6.3 million of severance expense.
Liquidity, debt and capital allocation
At July 31, 2016, cash, cash equivalents and marketable securities totaled $162.5 million; restricted cash was an additional $98.8 million. The company reported a $4.8 million working-capital deficit. Management said operating cash flow and available cash and securities were expected to cover anticipated FY2017 working-capital and capital-expenditure needs. Cash from operations was $49.1 million; financing activities used $27.6 million, including $17.4 million of dividends and $4.8 million of share repurchases.
No borrowings were outstanding at year-end. IDT Telecom had an undrawn $25 million secured revolving credit facility, extended to January 31, 2018, and was reported in covenant compliance. The $6.4 million mortgage on the Piscataway property was repaid in September 2015. A $0.19-per-share fourth-quarter FY2016 dividend was declared after year-end.
Changes, outlook and risks
- Consolidated revenue declined 6.3%; operating cash flow improved from the prior year. Reported net income fell sharply, principally against FY2015’s large Fabrix gain.
- Management expects Consumer Phone Services’ customers and revenue to continue declining. It cited plans to develop Boss Revolution, expand payment offerings and retailer reach, and build Net2Phone enterprise services. The filing provides no consolidated revenue or earnings guidance.
- The company is pursuing a broader reorganization into three entities, but remaining steps are subject to contingencies and approvals. It also invested up to $10 million in Cornerstone Pharmaceuticals; the remaining funding was completed after year-end, and the investment carries execution and valuation risk.
- Competition, declining telecom prices, over-the-top calling and unlimited mobile plans threaten calling revenue and margins. Foreign exchange, carrier/customer credit exposure, cybersecurity, and evolving telecom and money-transfer regulation are also material risks.
- IDT accrued $47.5 million at July 31, 2016 for disputed Universal Service Fund regulatory fees; its challenge to the audit methodology remained pending. A September 2016 FCC inquiry concerning former subsidiary Straight Path Spectrum could result in fines, penalties or related claims against IDT.
- Other notable matters include a pending Tyco lawsuit and potential restrictions on the Gibraltar bank’s European licensing following Brexit. The filing describes these as uncertain; it does not provide a clear quantified exposure for them.
Important facts for investors to verify
- Whether ongoing Telecom Platform Services profitability and cash generation offset continued declines in retail calling and wholesale revenue, excluding transaction gains and severance.
- The amount, timing and potential outcome of the $47.5 million regulatory-fee accrual and the FCC inquiry involving Straight Path Spectrum.
- How much of reported cash and securities is operationally available, given restricted balances, customer deposits and the working-capital deficit.
- Progress and costs of the proposed corporate reorganization, and the performance and risk exposure of the Cornerstone investment.
- Whether payment-services growth, retailer expansion and new Boss Revolution and Net2Phone products can produce durable revenue and margins.