IDT Corporation — Form 10-Q Summary
Business context and reporting period
Fiscal second quarter ended January 31, 2014; the filing also reports the six months ended that date. IDT is a multinational holding company focused primarily on telecommunications. Its reportable segments are Telecom Platform Services, Consumer Phone Services and Zedge; All Other includes Fabrix and real estate. Straight Path was spun off on July 31, 2013 and is presented as discontinued operations.
Key financial metrics
| Metric | Three months ended Jan. 31, 2014 | Six months ended Jan. 31, 2014 |
|---|---|---|
| Revenue | $406.4 million | $827.1 million |
| Gross profit / gross margin | $71.2 million / 17.5% | $141.5 million / 17.1% |
| Operating income / margin | $7.6 million / 1.9% | $14.9 million / 1.8% |
| Income from continuing operations | $3.0 million | $7.0 million |
| Net income attributable to IDT | $2.5 million | $6.1 million |
| Basic / diluted EPS | $0.12 / $0.11 | $0.28 / $0.27 |
| Cash from operating activities | Not separately reported for quarter | $13.8 million |
At January 31, 2014, cash and cash equivalents were $138.2 million and marketable securities were $11.2 million. Restricted cash totaled $60.4 million, largely relating to IDT Financial Services customer deposits and regulatory requirements. Working capital was negative $36.5 million. Revolving credit borrowings were $15.0 million, against a $25.0 million facility; notes payable totaled about $7.0 million. Total liabilities were $351.1 million and equity was $93.9 million.
Changes versus prior comparable periods
- Second-quarter revenue declined 1.2% from $411.5 million; six-month revenue increased 1.9% from $811.6 million.
- Second-quarter operating income rose to $7.6 million from $5.7 million, but income from continuing operations fell to $3.0 million from $3.9 million. Six-month operating income increased to $14.9 million from $12.3 million, while continuing-operations income fell to $7.0 million from $9.5 million.
- IDT-attributable net income declined to $2.5 million from $3.0 million for the quarter and to $6.1 million from $6.6 million for six months. The principal below-operating-income headwind was foreign currency transaction losses: $3.2 million for the quarter and $4.4 million for six months, versus gains in the prior periods.
- Operating cash flow declined to $13.8 million from $26.6 million for six months. Investing cash use was $7.8 million; financing cash use was $14.1 million. Cash and cash equivalents decreased by $8.8 million.
- Telecom Platform Services revenue grew 2.0% for six months, led by Retail Communications (+8.8%) and Payment Services (+9.4%); Wholesale Termination Services revenue fell 4.8%. Total platform minutes of use declined 16.5%. Consumer Phone Services revenue fell 24.1% as the business continued in harvest mode.
Outlook, commentary, risks and unusual items
- Management expected operating cash generation and cash, cash equivalents and marketable securities on hand to cover anticipated working capital and capital spending for the twelve months ending January 31, 2015. Expected capital expenditures were $16 million–$18 million.
- Management planned continued investment in Boss Revolution distribution, marketing and new payment services, including international money transfer. It cautioned that growth depends on new partnerships and adoption; traditional calling-card demand, pricing power and margins face ongoing pressure from wireless and IP-based alternatives.
- Telecom Platform Services SG&A was expected to increase somewhat as a share of revenue in fiscal 2014, reflecting sales-force expansion and growth initiatives. Consumer Phone Services’ customers and revenue were expected to continue declining.
- Foreign exchange movements are a material earnings risk, although management said net exposure at period-end was generally not material. Marketable securities and hedge-fund investments also carry investment risk.
- IDT was considering future use or disposition of its 520 Broad Street property, carried at $37.3 million; management warned a further impairment could be material.
- Legal matters include an appeal by Aerotel concerning a previously confirmed $5.4 million arbitration award that IDT had paid; German patent-related costs and security deposits, with $1.5 million accrued; and ongoing Tyco litigation. The filing says outcomes and potential impacts are uncertain in some matters.
- The company recorded a $0.6 million insurance gain for prior-period water damage. The Straight Path spin-off generated an estimated reimbursement liability of $2.4 million; IDT believed the distribution would qualify as tax-free, based on legal opinion.
- Management reported compliance with the credit facility covenants. The facility matures July 11, 2014; a $15 million borrowing outstanding at January 31 was repaid February 14, 2014.
- The filing reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective as of January 31, 2014.
Important facts for investors to verify
- Whether operating cash flow, working capital and restricted-cash requirements support the company’s liquidity needs, especially as customer deposits grow.
- Whether Boss Revolution and Payment Services growth can offset declines in wholesale traffic, traditional calling cards and Consumer Phone Services, while preserving margins.
- The trajectory and causes of foreign currency losses, and the performance and liquidity restrictions of hedge-fund and other investments.
- The timing and terms of credit-facility repayment or renewal, and the company’s ability to maintain covenant compliance.
- Potential further impairment at 520 Broad Street and the eventual costs or outcomes of outstanding legal and spin-off-related matters.