IDT

IDT Corporation 10-Q Summary: Quarter Ended April 30, 2010

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for IDT Corporation for the three and nine months ended April 30, 2010. IDT is a multinational holding company with operations primarily in telecommunications (IDT Telecom) and energy (Genie Energy). The company is classified as a "smaller reporting company." The fiscal year ends July 31.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Turnaround: The company reported a net income of $12.6 million for the quarter, a significant improvement from a net loss of $63.4 million in the same period of the prior year. This turnaround was driven by a $10.0 million litigation settlement gain and reduced impairment charges.
• Revenue Stability: Total revenues remained relatively flat for the quarter ($355.4M vs $356.9M prior year) but declined 10.2% for the nine-month period ($1,045.4M vs $1,164.6M prior year).
• Impairments: Impairment charges dropped significantly to $5,000 for the quarter and a net gain of $101,000 for the nine months, compared to $29.3 million and $38.1 million in the prior year periods, respectively.
• Restructuring: Restructuring charges increased to $2.9 million for the quarter (from $0.5 million) and $4.6 million for the nine months (from $7.7 million), primarily due to severance costs.
• Segment Performance:
  • IDT Telecom: Revenues increased 3.8% for the quarter but declined 5.0% for the nine months. Operating income improved significantly due to the litigation settlement.
  • IDT Energy: Revenues declined 19.3% for the quarter and 32.0% for the nine months due to lower commodity rates and a shrinking customer base.

Guidance, Outlook, and Risks

• Legal Proceedings:
  • STi Prepaid Settlement: The company settled litigation regarding false advertising of calling card minutes, receiving a $10.0 million cash payment.
  • Southwestern Bell: Facing a lawsuit alleging unpaid "switched access service" charges; potential liability is currently unestimable.
  • T-Mobile: Litigation regarding a breach of a Wholesale Supply Agreement; T-Mobile seeks damages, and the company is unable to estimate potential liability.
  • Skype/eBay: Ongoing patent infringement lawsuits with Skype and eBay; trial dates are set for late 2010.
• Tax Contingencies: The company is subject to various tax audits, including a significant VAT dispute in Sweden involving approximately $15.4 million in assessments and $3.0 million in penalties. The company has accrued $3.0 million for other significant tax audits (NJ sales tax, NY utility excise tax).
• Alternative Energy: The company has a 50% interest in AMSO, LLC (oil shale). The estimated maximum exposure to additional loss is $7.4 million. No revenues are currently generated from this segment.
• Liquidity: Management expects existing cash, cash equivalents, and operating cash flows to be sufficient to meet requirements for the next 12 months. The company regained full compliance with NYSE listing standards in April 2010.

Investor Verification Checklist

• Litigation Settlements: Verify the finality of the $10.0 million STi Prepaid settlement and the status of the Southwestern Bell and T-Mobile lawsuits, which pose unquantified liabilities.
• Tax Audits: Monitor the outcome of the Swedish VAT audit and the IRS audit finalization expected in July 2010, which could impact net operating loss carryforwards.
• Energy Segment Viability: Assess the sustainability of IDT Energy's customer base, which has declined to 364,000 meters, and the success of new customer acquisition programs in New Jersey and Pennsylvania.
• Alternative Energy Exposure: Review the funding requirements for AMSO, LLC, noting the $7.4 million estimated maximum exposure to additional loss.
• Telecom Margins: Analyze the trend in average revenue per minute (ARPM), which declined 10.9% year-over-year, and its impact on long-term profitability absent litigation gains.