IDT Corporation — Fiscal 2013 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended April 30, 2013; unaudited. IDT is a multinational holding company whose principal business is telecommunications. Comparisons below are with the corresponding fiscal 2012 periods.
Financial performance
| Metric | Three months ended April 30 | Nine months ended April 30 |
|---|---|---|
| Revenue | $397.2 million, up 4.6% from $379.7 million | $1,209.5 million, up 7.8% from $1,121.9 million |
| Gross profit, approximate | $66.0 million; 16.6% margin, versus $59.9 million; 15.8% | $198.6 million; 16.4% margin, versus $176.4 million; 15.7% |
| Operating income (loss) | $14.7 million, versus $2.2 million | $25.2 million, versus a $4.9 million loss |
| Net income attributable to IDT | $8.7 million, versus $3.0 million; diluted EPS $0.39 versus $0.14 | $15.3 million, versus $1.3 million; diluted EPS $0.69 versus $0.06 |
| Cash from operating activities | Quarterly figure not provided in the filing text | $60.5 million, versus $31.0 million |
| Capital expenditures | Quarterly figure not provided in the filing text | $10.9 million, versus $7.4 million |
Telecom Platform Services accounted for $388.9 million of quarterly revenue, up 4.5%. Retail Communications grew 19.1% and Payment Services 30.2%; Wholesale Termination Services fell 11.4%, and Hosted Platform Solutions fell 7.4%. Consumer Phone Services revenue continued to contract, declining 25.3%. The approximate gross profit and margins above are calculated as revenue less direct cost of revenues.
Liquidity, debt, and capital allocation
- At April 30, cash and cash equivalents were $152.1 million and marketable securities were $10.8 million. Restricted cash of $38.5 million is additional but not generally available for unrestricted use.
- Working capital was negative $33.4 million. Management said cash, cash equivalents, marketable securities, and anticipated operating cash flow were expected to cover anticipated working-capital and capital-expenditure needs for the next 12 months.
- Notes payable totaled approximately $28.5 million at April 30 ($21.8 million current and $6.7 million long-term). On May 1, IDT paid $21.1 million to settle and extinguish the mortgage-secured 520 Broad Street note. The remaining long-term term loan was $6.7 million, bearing 5.6% interest and due in 2015.
- IDT Telecom’s $25 million secured credit facility had no borrowings at April 30; a temporary $8 million March draw was repaid in April. The subsidiary was in covenant compliance.
- IDT paid $17.1 million in dividends during the nine months, including a $0.60-per-share special dividend, and suspended its regular quarterly dividend for the remainder of fiscal 2013. It repurchased $0.8 million of shares under its repurchase program.
Material changes and unusual items
- Quarterly operating income included $9.6 million of net gains related to legal matters. The prior-year quarter included $6.5 million of estimated litigation losses. For the nine-month comparisons, the prior year also included an $11.0 million T-Mobile litigation settlement loss and a $1.8 million Broadstripe settlement gain.
- Other income improved, including foreign-currency transaction gains of $1.5 million for the quarter and $3.6 million for the nine months. The nine-month tax provision was $12.8 million, compared with a $6.2 million tax benefit in the prior-year period. Management said cash taxes were expected to remain minimal while tax-loss carryforwards were used.
- Revenue growth was concentrated in Telecom Platform Services. Retail Communications benefited from Boss Revolution, while Payment Services growth was driven by international mobile top-up. Wholesale revenues faced lower prices and reduced quarterly minutes in response to higher termination rates in key destinations.
- All Other revenue increased, including growth at Zedge and Fabrix, but All Other reported operating losses of $1.6 million for the quarter and $4.0 million for the nine months. Fabrix incurred research and development expense as it developed and marketed video software.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management forecast capital expenditures of $11 million to $23 million for the 12 months ending April 30, 2014, funded from operating cash flow and available cash and securities.
- IDT planned to launch international money remittance services on a limited basis in fiscal Q4 2013; domestic bill payment and a prepaid virtual Visa offering were soft-launched in Q3. Growth depends in part on new mobile-top-up partnerships and adoption of newer payment offerings.
- Management expects continued decline in traditional calling-card demand and pricing power, and in Consumer Phone Services customers and revenue. Boss Revolution and newer payment offerings may not fully offset those declines; newer products generally carry lower gross margins than traditional calling cards.
- IDT announced a planned pro rata spin-off of Straight Path Communications, subject to board approval and effectiveness of its Form 10 registration statement. The intended distribution was one Straight Path share for every five corresponding IDT shares, with approximately $15 million expected to be transferred to Straight Path. The board could amend or abandon the plan; tax-free treatment was expected but not assured.
- Legal matters remained significant. IDT had accrued $15.4 million for specified disputes and disclosed reasonably possible additional liability of $8.5 million. On May 20, 2013, an appeals court ruled that IDT did not infringe certain Alexsam patents, affirmed a license for certain activations, and remanded damages for recalculation; IDT estimated damages could decline by about 50%, excluding interest. Aerotel received a $5.4 million arbitration award and sought to vacate it.
- IDT was evaluating potential impairment of the 520 Broad Street property, carried at $42.4 million; no adjustment had been recorded by April 30, and the review was expected to finish in fiscal Q4.
- Disclosed risks include telecom price competition and substitution by wireless/IP services, cybersecurity and network disruptions, payment-card and money-transmitter regulatory compliance, anti-money-laundering requirements, and investment and foreign-currency exposure. The filing reported that DOJ and SEC investigations related to alleged improper foreign payments had closed in March 2013. Management judged disclosure controls effective at April 30.
Important facts for investors to verify
- Whether the $9.6 million quarterly legal gain is recurring, and the ultimate outcomes and cash requirements of the Alexsam, Aerotel, and other legal matters.
- The result of the 520 Broad Street impairment review and the impact of the May 1 debt settlement on subsequent-period liquidity.
- Whether Boss Revolution, mobile top-up, and new payment products can sustain growth and margins amid declining traditional calling-card and wholesale economics.
- Completion, funding, and tax treatment of the proposed Straight Path spin-off, as well as the continued effect of restricted customer and regulatory cash on available liquidity.