IDT Corporation — Fiscal Q1 2013 Form 10-Q
Reporting period: Three months ended October 31, 2012; comparative period is the three months ended October 31, 2011. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context and performance
IDT is a multinational holding company whose largest business is Telecom Platform Services, providing retail and wholesale telecommunications and payment services. Other operations include Consumer Phone Services and smaller businesses such as Zedge, Fabrix, spectrum holdings, and intellectual property licensing. Genie Energy was spun off in October 2011 and is reported as discontinued operations.
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $400.6 | $376.8 |
| Gross profit | $65.3 | $57.4 |
| Gross margin | 16.3% | 15.2% |
| Operating income (loss) | $5.2 | $(11.1) |
| Income (loss) from continuing operations | $4.2 | $(8.1) |
| Net income (loss) attributable to IDT | $3.6 | $(4.3) |
| Diluted EPS | $0.16 | $(0.21) |
| Cash from operating activities | $25.7 | $(13.4) |
Financial position and liquidity
- Cash and cash equivalents were $166.1 at October 31, 2012, up from $151.5 at July 31, 2012. Restricted cash was $27.5; it includes balances tied to customer deposits and other requirements and is not generally available for ordinary corporate use.
- Current assets were $292.2 and current liabilities $318.1, resulting in a $25.9 working-capital deficit. Total assets were $455.7; total liabilities were $363.3; total equity was $92.4.
- Notes payable totaled approximately $30.3, comprising $0.6 current and $29.7 long-term. Long-term debt includes mortgage notes bearing 5.6% and 8.9% stated rates; the latter accrues 2% of interest until March 2013 rather than requiring its payment currently.
- Capital expenditures were $3.6. Management expected $11–$13 of capital expenditures during the twelve months ending October 31, 2013 and said cash on hand and expected operating cash flow should meet anticipated working-capital and capital needs for that period.
- A $25.0 revolving credit facility was available to IDT Telecom; none was borrowed or used for letters of credit at quarter-end. The subsidiary was reported in covenant compliance.
Changes versus the prior comparable quarter
- Revenue rose 6.3%, led by Telecom Platform Services revenue growth of 6.2%. Retail Communications grew 16.4% and Payment Services 25.2%; Wholesale Termination Services fell 2.8%, and Consumer Phone Services declined 25.6%.
- Telecom Platform Services minutes of use increased 19.0%, while wholesale revenue per minute fell 20.8%, reflecting lower underlying costs and pricing.
- Operating results improved substantially, chiefly because the prior-year quarter included $11.3 of T-Mobile and other settlement losses. Current-quarter other operating losses were $0.4.
- Prior-year results included Genie’s discontinued operations and a $2.0 gain from settling claims related to IDT Entertainment; neither contributed to current-quarter results. Comparisons therefore reflect both operating changes and the prior-year discontinued-operation items.
- Operating cash flow improved to $25.7 from a use of $13.4. Cash flow varies with the timing of receivables, payables, and other working-capital movements.
Outlook, risks, and unusual items
- Management expected Boss Revolution Pinless growth to more than offset continuing declines in traditional disposable calling cards during fiscal 2013, and anticipated further expansion of the platform. Payment Services growth depends partly on new IMTU provider partnerships and continued sales growth.
- Management expected moderate increases in Telecom Platform Services SG&A during the remainder of fiscal 2013, associated with sales-force expansion, marketing, and product and technology development. It expected telecom gross margins to stabilize or improve slightly.
- Consumer Phone Services is operated in “harvest mode”; management expected its customer base and revenue to continue declining. Wireless and IP-based alternatives are pressuring traditional calling-card demand and pricing, while competition in wholesale termination limits pricing power.
- The company declared $0.75 per share in dividends during the quarter. It paid a $0.15 regular dividend in October and a $0.60 special dividend in November, totaling $13.7 after quarter-end; it suspended regular $0.15 quarterly dividends for fiscal 2013.
- A September 2012 grant of 10% of subsidiary ICTI to CEO Howard Jonas vested immediately and produced $1.2 of stock-based compensation expense. Total quarterly stock-based compensation was $2.2.
- Legal exposures include a $10.1 accrued Alexsam patent judgment, with reasonably possible additional liability of up to $3.8; other specified litigation matters had $15.2 accrued and $7.7 of reasonably possible exposure above accrual. An Aerotel arbitration interim award received December 7, 2012 found potential lost-profit liability, but the company said it was evaluating its likely exposure. Southwestern Bell litigation was settled in October 2012.
- Tax audits were accrued at $0.9 in aggregate; the filing cautions that assessments could exceed accruals. The Florida tax matter was settled for $0.3 in November 2012. The company also reported an ongoing DOJ and SEC investigation and said it continued to cooperate; its own and Audit Committee investigations had found no evidence of the alleged improper payments.
- The 520 Broad Street property had a $42.9 carrying value and $23.0 mortgage balance. Management was considering future-use or disposition options, some of which could result in a material impairment loss.
- Management reported effective disclosure controls as of October 31, 2012 and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Verify the sustainability and cash conversion of revenue growth, especially Boss Revolution and IMTU growth, declining legacy calling cards, wholesale price-per-minute pressure, and Fabrix’s revenue recognition and cash collections.
- Review unrestricted liquidity separately from restricted cash and customer-related balances; assess the working-capital deficit, debt maturities and interest terms, and the implications of suspending regular dividends.
- Track the outcomes and updated estimates for Alexsam, Aerotel, other litigation, and tax audits, including potential liabilities above recorded accruals.
- Monitor the carrying value and planned use or disposition of 520 Broad Street, as management identified potential for a material loss.
- Note that the filing gives no consolidated full-year earnings or revenue guidance; management’s stated outlook is qualitative apart from the capital-expenditure range.