IDT Corporation — Q1 Fiscal 2016 Form 10-Q
Reporting period: Three months ended October 31, 2015; comparative period ended October 31, 2014. Figures are in U.S. dollars unless noted. Financial statements are unaudited.
Business context and reporting period
IDT is a multinational holding company operating primarily in telecommunications and payments. Its reportable segments are Telecom Platform Services and Consumer Phone Services; All Other includes Zedge, real estate and smaller businesses. IDT Telecom generated 99.2% of consolidated revenue in the quarter.
In August 2015, the board approved a plan to separate the company into IDT Telecom, Zedge and other holdings. The plan remains subject to change, board approval and third-party contingencies. Management targeted the Zedge spin-off for the second quarter of calendar 2016 and the remainder of the reorganization for the second half of calendar 2016.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $390.6 million | $412.9 million |
| Income from operations | $7.9 million | $79.6 million |
| Net income attributable to IDT | $4.2 million | $80.2 million |
| Basic / diluted EPS | $0.18 / $0.18 | $3.52 / $3.47 |
| Operating cash flow | $14.0 million | $8.3 million |
| Cash and cash equivalents at quarter-end | $105.5 million | $168.2 million |
Revenue fell 5.4% year over year. Direct costs were $324.5 million, leaving gross profit of approximately $66.1 million and a calculated gross margin of approximately 16.9% (versus approximately 16.7% in the prior-year quarter). Operating margin was approximately 2.0%; the prior-year result included a $75.1 million Fabrix sale gain. Excluding that gain, prior-year operating income was approximately $4.5 million, so reported operating income improved from that adjusted comparison.
Cash, cash equivalents and marketable securities totaled $152.8 million at October 31, 2015. Management reported a $3.9 million working-capital deficit, and noted that $81.7 million of cash was restricted and $11.8 million of reported cash held by payment and banking subsidiaries was substantially restricted. The company had $8.9 million in hedge-fund investments in addition to the $152.8 million total.
No borrowings were outstanding under IDT Telecom’s $25 million revolving facility at quarter-end; the facility matures January 31, 2017. IDT also repaid a $6.4 million mortgage on its Piscataway building at maturity in September 2015. Total liabilities were $333.2 million and total equity was $136.1 million.
Investing cash flow was negative $6.8 million, including $5.5 million of capital expenditures and net purchases of marketable securities. Financing cash flow was negative $11.2 million, including $4.2 million of dividends and $6.4 million of debt repayment. Cash decreased by $4.9 million during the quarter.
Material changes and operating performance
- Consolidated revenue declined $22.3 million. Telecom Platform Services revenue fell 4.5% to $385.7 million; Consumer Phone Services revenue fell 20.9% to $1.8 million.
- Within Telecom Platform Services, Retail Communications revenue decreased 5.8% to $173.7 million, Wholesale Carrier Services decreased 6.2% to $148.1 million, and Hosted Platform Solutions decreased 19.0% to $8.4 million. Payment Services grew 8.5% to $55.5 million.
- Retail Communications was pressured by lower traditional calling-card activity and competition on U.S.-to-Mexico calling. Retail minutes declined 11.8%; the company said higher average revenue per minute partly offset the volume decline. Wholesale revenue was affected by a shift toward lower-revenue destinations and reduced Latin American arbitrage opportunities, despite nearly flat minutes.
- Payment Services growth reflected higher international airtime top-up and money-transfer revenue, as well as growth at IDT Financial Services. Hosted Platform Solutions faced declines in managed services and cable telephony, including lower-rate contract renewals and customer attrition.
- Consumer Phone Services remains in harvest mode. Bundled-service customers declined to approximately 4,800 from 5,800 a year earlier; long-distance-only customers declined to approximately 21,400 from 26,800. Management expects this segment’s customers and revenue to continue declining.
- Telecom operating income increased to $10.0 million from $6.0 million, primarily reflecting lower operating expenses and improved Telecom Platform Services results. Consolidated income was far below the prior-year reported figure because that period included the Fabrix gain.
- Other expense, net was $0.6 million, compared with $1.3 million of other income a year earlier, including foreign-exchange losses of $1.2 million in the current quarter. Income tax provision was $2.9 million versus $0.5 million; management cited higher income before taxes excluding the Fabrix gain and a higher effective tax rate.
Guidance, risks, contingencies and unusual items
- Management said cash from operations and cash, cash equivalents and marketable securities on hand were expected to meet anticipated working-capital and capital-expenditure needs for the 12 months ending October 31, 2016. Expected capital expenditures for that period were approximately $19 million to $21 million.
- The company planned a new Boss Revolution app, including peer-to-peer voice calling and instant messaging, for the second quarter of calendar 2016. Management expected the features to support market penetration and the brand.
- Fabrix was sold in October 2014. The company had a $3.7 million receivable from the sale at quarter-end; $6.5 million of escrow was released in October 2015, with any remaining unclaimed balance expected to be released in April 2016. The prior-year quarter’s $75.1 million recorded gain materially distorts year-over-year earnings comparisons.
- IDT had $78.2 million of refundable customer deposits related to its Gibraltar-based bank, $12.9 million of performance bonds, $0.4 million of letters of credit and $2.3 million of purchase commitments. Management excluded the performance bonds from its contractual-obligations schedule because payment amount and timing were uncertain.
- A renewed Tyco lawsuit alleges breach of a settlement agreement. Tyco moved to dismiss; IDT opposed the motion, and oral argument had not been scheduled. The company said other ordinary-course legal proceedings were not expected to have a material adverse effect.
- Foreign-exchange exposure includes international revenues (32% of consolidated revenue) and NOK exposure associated with Zedge. Forward-contract fair values were $144,000 as assets and $247,000 as liabilities. Investments in marketable securities and hedge funds are subject to market-price risk.
- IDT stated it was evaluating the impact of the new revenue-recognition standard, which it planned to adopt August 1, 2018. A deferred-tax presentation standard is effective for the company beginning August 1, 2017; the company was evaluating when to apply it.
- The board declared a $0.19-per-share dividend on December 1, 2015, payable on or about December 18. The company reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Most important facts for investors to verify
- Progress, approvals and timing of the proposed Zedge spin-off and broader corporate reorganization.
- Whether revenue declines in Retail Communications and Wholesale Carrier Services continue, and whether Payment Services growth persists.
- Cash availability after separating restricted and substantially restricted balances, and the company’s ability to fund planned capital expenditures and dividends.
- Collection of the remaining Fabrix-sale receivable and release of escrow, as well as any post-closing claims.
- Developments in the Tyco litigation, performance-bond exposure and money-transmitter licensing requirements.
- Actual results versus the stated capital-expenditure outlook and the expected launch timing and commercial effect of the updated Boss Revolution app.