IDT

IDT Corporation 10-Q Summary: Quarter Ended April 30, 2007

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, 2007. IDT is a multinational holding company with operations in telecommunications (IDT Telecom), energy services, grocery distribution, media, and debt portfolio management (IDT Capital). The company's fiscal year ends on July 31.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 11.3% ($61.8 million) for the quarter and 9.0% ($150.7 million) for the nine-month period compared to the prior year. This was primarily driven by a 19.2% decline in IDT Telecom revenues due to lower calling card sales in the U.S. and Europe and the sale of the U.K. business (Toucan).
• Profitability Shift: While continuing operations reported a loss of $15.9 million for the quarter, the nine-month period showed a net income of $171.0 million. This positive result was almost entirely due to a $198.2 million gain from the sale of IDT Entertainment (discontinued operations) and a $44.7 million gain from the sale of Toucan.
• Segment Performance: IDT Capital revenues grew 81.3% year-over-year for the quarter, driven by the IDT Energy business. Conversely, Prepaid Products revenues fell 25.6% due to competitive pricing pressures and volume declines.
• Cost Reductions: Selling, general, and administrative (SG&A) expenses decreased 15.8% for the quarter, attributed to cost-saving programs and the integration of Net2Phone.

Guidance, Outlook, and Risks

• Outlook: Management expects further declines in calling card revenues, though at a lower rate than recent periods. IDT Capital is expected to continue growing, particularly the IDT Carmel debt portfolio business. Capital expenditures for fiscal 2007 are projected to be approximately $35 million.
• Restructuring: A company-wide cost savings program initiated in late fiscal 2006 resulted in the termination of approximately 570 employees. Management expects additional severance charges of approximately $12.0 million in the fourth quarter of fiscal 2007.
• Legal Proceedings: IDT is involved in litigation regarding patent infringement (Skype), false advertising by competitors in the calling card market, and a dispute with Tyco regarding wavelength rights. Management believes these will not have a material adverse effect.
• Accounting Adjustments: The company adopted the equity method for certain pooled investment vehicles in Q3 fiscal 2007. This resulted in an overstatement of "Other income, net" by $18.6 million for the quarter and $15.4 million for the nine months ended April 30, 2007.
• Liquidity: The company holds $674.3 million in cash, cash equivalents, and marketable securities. Management believes these resources are sufficient to meet requirements for the next 12 months.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings by excluding the $198.2 million gain from the IDT Entertainment sale, which drove the nine-month net income.
• Calling Card Volume Trends: Confirm the extent of the 35.3% decline in prepaid product minutes-of-use and the effectiveness of recent price cuts in regaining market share.
• Accounting Change Impact: Review the $18.6 million overstatement in "Other income" related to the change in accounting for pooled investment vehicles to understand true operating performance.
• Future Restructuring Costs: Monitor the anticipated $12.0 million in additional severance charges expected in the fourth quarter of fiscal 2007.
• Regulatory Accruals: Assess the $41.0 million accrued liability for telecom regulatory fees (USF, TRS) and the status of the appeal regarding audit findings.