IDT Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended July 31, 2020; this is an annual filing, not a standalone fourth-quarter report. The filing provides annual comparisons with FY2019 but does not provide a clear set of standalone Q4 financial results.
Business context
IDT operates in communications and payment services through Telecom & Payment Services (TPS) and net2phone. TPS accounted for 96.2% of FY2020 revenue; net2phone accounted for 3.8%. Management describes money transfer, National Retail Solutions (NRS) and net2phone UCaaS as growth businesses, funded primarily by cash flows from established offerings.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $1,345.8 million | $1,409.2 million |
| Income (loss) from operations | $17.9 million | $(1.0) million |
| Net income attributable to IDT | $21.4 million | $0.1 million |
| Diluted EPS | $0.81 | $0.01 |
| Operating cash flow | $(29.6) million | $85.1 million |
| Capital expenditures | $16.0 million | $18.7 million |
- Consolidated revenue fell 4.5%. Direct costs were 80.5% of revenue versus 83.3% in FY2019; the resulting gross margin was approximately 19.5%. Operating margin was approximately 1.3%, compared with a slight operating loss in FY2019.
- TPS revenue declined 4.9% to $1,294.9 million, while operating income increased to $42.3 million from $14.3 million. TPS direct costs declined faster than revenue, improving its direct-cost ratio by 250 basis points to 82.8%.
- Growth offerings expanded: BOSS Revolution Money Transfer revenue rose 108% to $48.0 million, and NRS revenue rose 93% to $12.0 million. Mobile Top-Up increased 22.9% to $334.3 million.
- Core voice businesses contracted: BOSS Revolution Calling revenue declined 5.4% to $463.9 million; Carrier Services revenue fell 23.4% to $393.8 million. TPS minutes of use fell 16% overall.
- net2phone revenue grew 7.5% to $50.8 million, but its operating loss widened to $14.7 million from $6.5 million. UCaaS revenue rose 30.2% to $31.9 million; Platform Services revenue declined 16.8% to $18.9 million.
- Net income benefited from a $3.7 million income-tax benefit, including valuation-allowance releases. The company recorded $5.1 million of net other operating expense, including foreign non-income tax accruals, a legal accrual and an asset write-off, partly offset by insurance recoveries.
Liquidity, cash flow and debt
- At July 31, 2020, cash and cash equivalents were $84.9 million, restricted cash was $116.4 million, debt securities were $18.4 million, and current equity investments were $6.0 million. Management cited $109.2 million of cash, cash equivalents, debt securities and current equity investments; $11.0 million held by IDT Payment Services was unavailable for general purposes.
- Working capital was negative $2.7 million. Current liabilities included $116.0 million of customer deposits, primarily related to the Gibraltar-based bank. Restricted cash at that bank was $116.3 million. Both customer deposits and restricted cash declined substantially from FY2019.
- Operating cash flow turned negative, mainly reflecting a $70.4 million decline in customer deposits at IDT Financial Services, partly offset by lower receivables. Cash, cash equivalents and restricted cash together decreased $56.0 million to $201.2 million.
- No material debt balance was reported at year-end. A $25 million revolving credit facility matured July 15, 2020; the company borrowed and repaid $1.4 million during the year. A $10 million PPP loan received in April was returned nine days later.
- Management expected FY2021 operating cash flow and available financial resources to cover anticipated working capital and capital needs. FY2021 capital expenditures were estimated at $18–$20 million. The filing gives no numerical revenue or earnings guidance.
Outlook, risks and notable items
- Management expects continued rotation toward higher-margin growth offerings, while seeking to maximize cash generation from core businesses. It expects Carrier Services revenue and minutes to keep declining as voice traffic shifts to video, messaging and other services.
- COVID-19 effects were mixed: digital consumer transactions increased, while retail closures and lower foot traffic affected some channels; Carrier Services was pressured by reduced business calling. Management said the company had sufficient liquidity for the foreseeable future, but noted uncertainty around the pandemic and economic conditions.
- Key risks include persistent price and substitution pressure in calling and wholesale voice; competition and execution risks in money transfer, POS and UCaaS; cybersecurity and service disruption; payment, money-transmitter and telecom regulation; customer credit exposure; foreign exchange, political and operational risks; and Brexit-related licensing uncertainty for IDT Financial Services.
- A USAC audit of the company’s 2017 FCC Form 499-A remained unresolved. Accrued regulatory fees were $40.8 million at July 31, 2020; additional interest or penalties could apply depending on the outcome.
- Several class-action and other legal matters remained pending, including the Straight Path stockholder litigation. The company said it could not estimate potential liability for specified cases. It also disclosed $18.0 million of performance bonds and $0.8 million of potential Ringsouth acquisition consideration not included in contractual-obligation totals.
- The prior-year material weakness in review controls over certain foreign non-income taxes was reported as remediated. Management and the auditor concluded internal control over financial reporting was effective as of July 31, 2020; the financial-statement audit opinion was unqualified.
- The company repurchased 671,117 Class B shares for $4.2 million in FY2020 and paid no dividends. After year-end, it repurchased a further 463,792 shares for $2.8 million through October 12, 2020.
Important facts for investors to verify
- Whether the sharp decline in operating cash flow is principally a temporary customer-deposit movement or indicates ongoing cash-generation pressure; distinguish restricted funds from resources available for general use.
- Whether growth in Money Transfer, NRS, Mobile Top-Up and UCaaS can offset continued declines in Carrier Services and Calling, and whether net2phone can reduce its operating losses.
- The eventual USAC audit determination and any associated regulatory-fee, interest or penalty exposure.
- Developments in the pending litigation, sales-tax assessments, and money-transmitter or Gibraltar/EU licensing requirements.
- How COVID-19, foreign exchange movements and customer credit quality affect demand, receivables and FY2021 liquidity and capital spending.