IDT Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2015. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. IDT is a multinational holding company whose principal business is telecommunications and payments.
Financial performance
| Metric | Three months ended Apr. 30, 2015 | Three months ended Apr. 30, 2014 | Nine months ended Apr. 30, 2015 | Nine months ended Apr. 30, 2014 |
|---|---|---|---|---|
| Revenue | $383.9 | $403.8 | $1,191.0 | $1,230.9 |
| Income from operations | $2.5 | $9.2 | $85.8 | $24.0 |
| Net income attributable to IDT | $0.6 | $5.0 | $83.2 | $11.1 |
| Basic / diluted EPS | $0.02 / $0.02 | $0.22 / $0.22 | $3.64 / $3.58 | $0.51 / $0.48 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $27.8 | $29.6 |
Consolidated direct costs were $316.5 million in the quarter and $989.1 million year to date. The resulting gross margins were approximately 17.6% and 17.0%, respectively, compared with approximately 17.7% and 17.3% in the corresponding 2014 periods. The filing reports no formal earnings guidance.
Liquidity, debt and cash flows
- At April 30, cash and cash equivalents were $114.8 million and marketable securities were $31.4 million. Management described these combined resources, $146.1 million, plus expected operating cash flow as sufficient for anticipated working capital and capital needs for the next 12 months.
- Working capital was slightly negative: current assets of $332.7 million versus current liabilities of $332.9 million. Restricted cash was $73.6 million; a further $9.5 million of cash held by payment and financial-services subsidiaries was considered unavailable for other purposes.
- No borrowings were outstanding on the $25 million revolving credit facility. Notes payable totaled $6.4 million, classified as current. IDT Telecom was in compliance with its credit covenants.
- Nine-month cash flow: operating activities provided $27.8 million; investing activities used $5.1 million; financing activities used $55.2 million. Cash declined $39.1 million to $114.8 million, including a $6.6 million unfavorable foreign-exchange effect.
- Capital expenditures were $22.8 million year to date. The company anticipated approximately $17.5 million of capital expenditures over the 12 months ending April 30, 2016, including building renovation costs.
Changes versus the prior comparable periods
- Quarterly revenue declined 4.9%; nine-month revenue declined 3.2%. Telecom Platform Services revenue fell 3.9% in the quarter and 2.8% year to date. Retail Communications and Payment Services grew, but declines in Wholesale Termination Services were larger; Hosted Platform Solutions also contracted.
- Quarterly operating income fell to $2.5 million from $9.2 million, and IDT-attributable net income fell to $0.6 million from $5.0 million. The quarter included $6.2 million of severance expense and a $1.6 million corporate legal-related operating loss.
- Nine-month operating income and earnings rose substantially, largely because of the $76.9 million gain on the October 2014 sale of Fabrix. The gain is a significant non-recurring item and should be distinguished from ongoing operating performance.
- Fabrix sale proceeds attributable to IDT were $68.1 million after adjustments. At April 30, $36.4 million had been received and $31.7 million was recorded as a receivable; the company reported receiving $23.2 million of that receivable in June 2015. $13.0 million of proceeds was placed in escrow for potential post-closing claims.
- Cash dividends paid in the nine-month period totaled $43.2 million, or $1.85 per share, versus $9.7 million in the prior-year period. A further $0.18-per-share dividend was declared in June 2015.
Outlook, risks and unusual items
- A February–March workforce reduction is expected to lower global compensation costs by approximately 7% and reduce the current SG&A run rate by approximately $10 million annually, beginning in fiscal fourth quarter 2015. Severance expense was $6.2 million in the quarter; $5.1 million remained accrued at April 30.
- Management expected to add instant messaging and free peer-to-peer voice calling to the Boss Revolution app in the second half of calendar 2015, and to begin offering a mobile/web money-transfer service later in calendar 2015. Payment-services growth depends in part on new airtime top-up partnerships, continued volume growth and new offerings.
- Management expects Consumer Phone Services customers and revenue to continue declining; it operates the business in “harvest mode.” Wholesale termination faces lower-revenue traffic mix and fewer foreign-exchange arbitrage opportunities. Hosted services face subscriber attrition and lower contract rates.
- International operations generated 30% of revenue in the nine-month periods compared. The filing identifies foreign-currency and investment-market volatility as risks. Marketable securities and hedge-fund investments were $31.4 million and $9.1 million, respectively.
- The New York Court of Appeals affirmed dismissal of IDT’s claim against Tyco; IDT said it was evaluating its options. The company also reported ordinary-course legal proceedings, purchase commitments of $3.8 million, $3.3 million of letters of credit and $11.0 million of performance bonds. The filing states there were no material changes to previously disclosed risk factors.
- The company was evaluating a new revenue-recognition standard, then expected to adopt it August 1, 2017; the FASB had proposed a one-year deferral. Actual operating results may differ from management’s expectations, and management cautioned that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether underlying Telecom Platform Services margins and profitability stabilize, particularly given weakness in wholesale termination and hosted services.
- Collection of the remaining Fabrix sale receivable and release of escrow funds, including any post-closing claims.
- Whether workforce savings materialize as expected and how they compare with severance and other restructuring costs.
- Cash availability after considering restricted and substantially restricted balances, customer deposits, dividends, capital spending and debt obligations.
- Progress and financial contribution from planned Boss Revolution messaging and money-transfer services, including licensing and partnership execution.