IDT

Business Context and Reporting Period

IDT Corporation is a multinational holding company operating through five reportable segments: Prepaid Products, Consumer Phone Services, Wholesale Telecommunications Services (collectively IDT Telecom), IDT Energy, and IDT Carmel. All other operations are grouped under IDT Capital. The company is headquartered in Newark, New Jersey.

Reporting Period: Fiscal year ended July 31, 2008.

Listing Status: The company received notice from the New York Stock Exchange (NYSE) in late September and October 2008 that it was no longer in compliance with market capitalization and minimum stock price requirements ($1.00), placing its listing at risk.

Key Financial Metrics

Note: Fiscal 2007 net income was driven by a $205.2 million gain on the sale of IDT Entertainment (discontinued operations). Fiscal 2008 included a $40.0 million gain from an arbitration award.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 6.7% to $1.878 billion, primarily due to a 13.4% decline in IDT Telecom revenues. This was driven by lower calling card sales in the U.S. and Europe and a decline in consumer phone services.
• Profitability Deterioration: The company swung from a net income of $58.6 million in 2007 to a net loss of $224.3 million in 2008. Loss from continuing operations widened significantly.
• Segment Performance:
  • IDT Telecom: Recorded an operating loss of $40.1 million (improved from $63.2 million loss in 2007) largely due to the $40.0 million arbitration award. Prepaid Products revenues fell 19.9%.
  • IDT Energy: Revenues grew 30.5% to $248.9 million due to customer base expansion, though operating income dropped 47.0% to $6.0 million.
  • IDT Carmel: Revenues surged 740% to $45.6 million due to a change in revenue recognition methodology (effective yield method), but the segment reported an operating loss of $25.3 million driven by a $31.7 million bad debt charge.
• Impairments and Restructuring: Restructuring and impairment charges increased to $66.2 million, including $25.3 million in goodwill impairments across Wholesale, Rechargeable, and Carmel reporting units.

Guidance, Outlook, and Risks

• Internal Control Weakness: The company identified a material weakness in internal controls regarding the annual testing for impairment of goodwill and intangible assets, resulting in a $25.3 million audit adjustment. Management plans to remediate this by enhancing valuation expertise and review procedures.
• Liquidity and Capital: The company expects existing cash, marketable securities, and operating cash flows to meet requirements for the next 12 months. However, it is actively evaluating divestitures of non-core assets and has retained Jefferies & Company as a financial advisor.
• Legal and Regulatory Risks:
  • IRS Audit: The IRS determined the company owed approximately $75 million in taxes for fiscal years 2001-2004 plus $39.5 million in interest. The company has paid $30 million and is negotiating payment timing.
  • FCC Penalty: The FCC issued a Notice of Apparent Liability for $1.3 million regarding failure to file an international agreement.
  • Delisting Risk: The company faces potential delisting from the NYSE due to failure to meet market cap and stock price thresholds.
• Investment Risks: The company holds $60.5 million in pooled investment vehicles (including hedge funds) and $14.3 million in auction rate notes (Fannie Mae/Freddie Mac), which have declined in value and are subject to market volatility.

Key Facts for Investor Verification

• NYSE Compliance Plan: Verify the status of the plan submitted to the NYSE to cure market capitalization and stock price deficiencies to avoid delisting.
• IRS Tax Liability: Confirm the final settlement amount and payment schedule for the $75 million tax assessment plus interest.
• Goodwill Impairment: Review the remediation of the material weakness in internal controls to ensure future impairment testing is accurate.
• IDT Carmel Bad Debt: Monitor the $31.7 million bad debt charge and the effectiveness of new management strategies in the debt collection segment.
• Auction Rate Notes: Assess the potential for further write-downs on the $14.3 million par value of auction rate notes following the conservatorship of Fannie Mae and Freddie Mac.