IDT Corporation — Q2 FY2016 Form 10-Q
Business context and reporting period. The quarter and six-month period ended January 31, 2016; fiscal year ends July 31. IDT operates primarily in telecommunications and payments. Its reportable segments are Telecom Platform Services and Consumer Phone Services; All Other includes Zedge and other businesses. IDT Telecom generated 99.1% of consolidated revenue in the six-month period.
Financial performance
| Metric | Three months ended Jan. 31, 2016 | Prior-year quarter | Six months ended Jan. 31, 2016 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $382.5 million | $394.2 million | $773.0 million | $807.1 million |
| Income from operations | $6.4 million | $3.7 million | $14.3 million | $83.3 million |
| Net income | $4.7 million | $2.8 million | $9.2 million | $83.1 million |
| Net income attributable to IDT | $4.1 million | $2.5 million | $8.3 million | $82.7 million |
| Diluted EPS | $0.18 | $0.11 | $0.36 | $3.57 |
| Operating cash flow | Not separately presented for the quarter | $25.1 million | $21.0 million |
Margins. Consolidated gross margin, calculated as revenue less direct cost of revenues, was approximately 16.4% for the quarter versus 16.6% a year earlier, and 16.7% for the six-month period, broadly unchanged year over year. Operating margin was approximately 1.7% for the quarter versus 0.9%; the six-month comparison is distorted by the prior-year Fabrix gain.
Cash, liquidity and debt. At January 31, 2016, cash and cash equivalents were $99.5 million, marketable securities $46.8 million, and restricted cash $88.8 million. Management reported cash, cash equivalents and marketable securities of $146.3 million and a $2.9 million working-capital deficit. Of unrestricted cash, $9.1 million held by payment and banking subsidiaries was unavailable for other purposes. IDT had no borrowings outstanding under its $25 million revolving facility; the facility maturity was extended to January 31, 2018. The company repaid $6.4 million of mortgage debt during the six months. Total assets were $455.8 million and total equity was $127.7 million.
Six-month investing cash outflow was $9.9 million, including $9.2 million of capital expenditures; financing cash outflow was $21.0 million, including $8.6 million of dividends, $4.8 million of share repurchases and debt repayment. Cash and cash equivalents declined $10.8 million to $99.5 million, including a $5.1 million adverse exchange-rate effect.
Material changes versus prior comparable periods
- Quarterly revenue declined 3.0%; six-month revenue declined 4.2%. Retail Communications revenue fell 7.7% for the quarter and 6.7% year to date. Payment Services grew 6.9% and 7.7%, respectively, while Hosted Platform Solutions and Consumer Phone Services continued to contract.
- Quarterly operating income rose to $6.4 million from $3.7 million, supported by lower SG&A and improved All Other results, despite lower revenue. Six-month operating income fell sharply from $83.3 million to $14.3 million because the prior-year period included a $75.6 million gain from the Fabrix sale. Excluding that gain and Fabrix results, management said All Other operating results improved.
- Six-month net income attributable to IDT fell to $8.3 million from $82.7 million, principally reflecting the absence of the Fabrix gain. The prior-period gain was recorded by a wholly owned non-U.S. subsidiary and was not taxable in its tax domicile; management reported no current plans to repatriate the proceeds.
- SG&A declined 7.6% for the quarter and 6.9% for the six months. Direct costs declined, but consolidated gross margin was essentially flat. Foreign-currency transaction losses contributed to other expense in fiscal 2016.
- Dividends paid during the six months were $0.37 per share, compared with $1.67 a year earlier, which included two special dividends. The board approved a new authorization to repurchase up to 8.0 million Class B shares; 398,376 shares were repurchased under the program during the six-month period.
Outlook, commentary and risks
- Management expects operating cash flow and cash, cash equivalents and marketable securities on hand to be sufficient for anticipated working capital and capital expenditure needs through January 31, 2017. Expected capital expenditures for that 12-month period are $19–$21 million. The filing provides no earnings or revenue guidance.
- IDT planned to launch an updated Boss Revolution app, adding peer-to-peer voice calling and instant messaging, in the second quarter of calendar 2016. Management expects the update to support market penetration and brand awareness. It said competition offering unlimited calls to Mexico and ongoing declines in certain international and traditional calling-card markets are weighing on Retail Communications.
- The board’s reorganization plan contemplated separating IDT Telecom, Zedge and other holdings. Zedge filed a Form 10 registration statement on March 8, 2016; the company targeted its spin-off before fiscal year-end and the rest of the reorganization in the second half of calendar 2016. Timing and structure remained subject to approvals and contingencies. The planned Zedge distribution was one share for every three corresponding IDT shares; IDT expected shareholders to own approximately 83% of Zedge after the spin-off.
- IDT Financial Services could receive an estimated €4.7 million in cash and €1.6 million in Visa preferred stock if Visa’s acquisition of Visa Europe closes. The estimates are preliminary and subject to adjustment; closing is not assured. The filing also notes a potential, achievement-dependent earn-out payable in 2020.
- The company reported several denial-of-service attacks during the quarter against internet telephony and web infrastructure. It reported no known data breach or material direct impact, but noted limited losses, possible lost revenue opportunities and response costs; further protective measures were being evaluated.
- A renewed Tyco lawsuit alleging breach of a settlement agreement was awaiting a court decision after oral argument on March 9, 2016. Other ordinary-course proceedings were not expected by management to have a material adverse effect. Outstanding performance bonds totaled $13.1 million; the filing says potential payments and timing are uncertain.
- Other notable exposures include $85.1 million of refundable IDT Financial Services customer deposits, $1.6 million of purchase commitments, and investment risk on $46.8 million of marketable securities and $8.6 million of hedge-fund investments. The company also disclosed cybersecurity, foreign-exchange, regulatory and investment-market risks.
Important facts for investors to verify
- Whether the Zedge spin-off and broader reorganization received required approvals and proceeded on the stated timetable and terms.
- Whether core telecom revenue declines—particularly Retail Communications and Hosted Platform Solutions—continued, and whether Payment Services growth and the planned app update offset them.
- Underlying earnings and cash generation excluding the nonrecurring Fabrix gain in the prior-year comparison, as well as changes in foreign-exchange losses and tax expense.
- Availability of reported liquidity after accounting for restricted cash, customer deposits and funds unavailable for general use; also monitor the working-capital deficit and planned capital expenditures.
- Completion and value of the Visa Europe transaction consideration, release of any remaining Fabrix escrow proceeds, and outcome of the Tyco litigation.
- Whether the reported denial-of-service attacks or other security incidents lead to operational disruption, customer losses, claims or additional costs.