IDT Corporation — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended July 31, 2019; this is an annual report, not a filing for calendar-year 2019 Q4. Comparative figures are for fiscal 2018 unless stated otherwise. Amounts are in U.S. dollars.
Business context
IDT operates primarily in telecommunications and payments through Telecom & Payment Services (TPS) and net2phone. TPS includes BOSS Revolution Calling, Carrier Services, Mobile Top-Up, National Retail Solutions (NRS), money transfer, and other offerings. net2phone provides cloud communications and telephony services to businesses. TPS generated 96.6% of consolidated revenue in FY2019.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $1,409.2 million | $1,547.5 million |
| Gross profit, calculated as revenue less direct costs | $235.2 million; 16.7% margin | $241.5 million; 15.6% margin |
| Operating income (loss) | $(1.0) million | $8.4 million |
| Net income | $0.3 million | $5.2 million |
| Net income attributable to IDT; diluted EPS | $0.1 million; $0.01 | $4.2 million; $0.17 |
| Cash flow from operating activities | $85.1 million | $20.4 million |
| Capital expenditures | $18.7 million | $20.6 million |
- TPS revenue was $1,361.9 million, down 9.9%, and operating income was $14.3 million, down from $25.8 million. net2phone revenue rose 35.6% to $47.3 million, while its operating loss widened to $6.5 million from $2.7 million.
- At July 31, 2019, total assets were $443.7 million and total liabilities were $390.1 million. Current assets of $368.5 million were below current liabilities of $389.1 million, a $20.6 million working capital deficit.
- The company reported $80.2 million of cash and cash equivalents, $2.5 million of debt securities, and $5.7 million of current equity investments. Management cited $88.4 million in cash, cash equivalents, debt securities, and current equity investments; $13.4 million held by IDT Payment Services was unavailable for other purposes. Separately, $176.8 million of restricted cash was held by its Gibraltar-based bank.
- There was no reported year-end borrowing balance. A $25 million revolving credit facility expired July 15, 2019; the company borrowed and repaid $3.0 million during FY2019.
Changes versus the prior year
- Revenue declined 8.9%, primarily reflecting lower Carrier Services revenue (down 19.5%) and BOSS Revolution Calling revenue (down 7.4%). Carrier Services minutes fell 11.3%, while BOSS Revolution Calling minutes declined 10.1%.
- Mobile Top-Up revenue increased 7.3% to $272.0 million. TPS Growth revenue rose 38.1% to $29.4 million; NRS revenue grew 56%, and BOSS Revolution Money Transfer direct-to-consumer revenue grew 113%.
- net2phone-UCaaS revenue increased 84.4% to $24.5 million, reflecting channel and international expansion and the acquisition of Canadian provider Versature. Versature contributed $5.1 million of FY2019 revenue.
- Consolidated operating results moved from $8.4 million of income to a $1.0 million loss, and IDT-attributable net income fell to $0.1 million. Higher SG&A as a share of revenue and an $8.0 million accrual for foreign non-income-related taxes contributed to the deterioration.
- Operating cash flow increased to $85.1 million, with a substantial contribution from a $59.1 million increase in customer deposits at the Gibraltar-based bank. Cash generation therefore should be assessed alongside customer-fund obligations and restrictions.
- FY2019 results reflect adoption of ASC 606, including a $9.1 million cumulative adjustment to opening accumulated deficit. FY2018 was not restated. Separately, FY2018 included a $9.5 million increase in breakage revenue from a change in estimate, limiting direct comparability.
Outlook, risks, contingencies, and unusual items
- Management expected operating cash flow and the July 31, 2019 balance of cash, cash equivalents, debt securities, and current equity investments to cover anticipated FY2020 working capital and capital expenditure needs. FY2020 capital expenditures were estimated at $20–$22 million. No quantitative revenue or earnings guidance was provided.
- Management expects secular pressure on traditional international calling from free or low-cost internet calling and messaging, unlimited wireless plans, and price competition. It expects Carrier Services to face long-term pressure as voice traffic shifts away from traditional operators.
- The $8.0 million foreign tax accrual was accompanied by a $2.0 million deferred tax asset and tax benefit. The company corrected its previously issued quarterly statements for the related accruals and determined the quarterly corrections were not material individually.
- Management and the auditor reported a material weakness in internal control over financial reporting concerning management review controls for non-income taxes at a foreign entity. The auditor gave an adverse opinion on internal control; the financial statement audit opinion was unqualified. Planned remediation included outside tax assistance, employee training, and improved documentation.
- The FCC-related regulatory fees accrual was $44.7 million and was under audit by the Universal Service Administrative Company. Additional amounts, interest, or penalties could arise if the company’s calculations are challenged.
- Other exposures include unresolved class actions and litigation, including the Straight Path stockholder action, for which potential liability was not estimable; potential sales and use tax exposure following the Wayfair decision; and regulatory, licensing, cybersecurity, privacy, customer-credit, and foreign-exchange risks.
- Contractual obligations totaled $54.6 million, including $36.1 million of purchase commitments and $18.5 million of operating leases. The company also disclosed $16.4 million in performance bonds, excluded from that total because payment timing and amount were uncertain.
- The company repurchased 729,110 Class B shares for $3.9 million in FY2019 and paid no dividends. Howard S. Jonas held approximately 69.5% of combined voting power as of October 7, 2019; Class B shares carry substantially fewer votes per share than Class A shares.
Important facts for investors to verify
- Whether the non-income tax control weakness has been remediated, and whether further tax accruals or restatements are required.
- The outcome of the $44.7 million regulatory-fee audit, including any additional liability, interest, or penalties.
- How much reported operating cash flow is recurring and available after accounting for restricted cash, customer deposits, and working-capital movements.
- Whether growth in net2phone, NRS, and money transfer can offset continued declines in core calling and carrier services, while improving segment profitability.
- Potential costs or business effects from litigation, sales-tax assessments, regulatory changes, and the Gibraltar bank’s ability to serve European customers following Brexit-related changes.