IDT

IDT Corporation 10-Q Summary: Period Ended January 31, 2008

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended January 31, 2008, and the six months ended on that date. IDT Corporation is a multinational holding company with principal businesses in telecommunications (IDT Telecom), energy services (IDT Energy), receivables portfolio management (IDT Carmel), and various other ventures (IDT Capital). The company operates through five reportable segments: Prepaid Products, Consumer Phone Services, Wholesale Telecommunications Services, IDT Energy, and IDT Carmel.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 7.0% ($35.7 million) for the three months and 8.7% ($90.0 million) for the six months compared to the prior year. This was primarily driven by declines in IDT Telecom revenues due to lower calling card sales in the U.S. and Europe, and the prior-year sale of the U.K.-based Toucan business.
• Increased Losses: Net loss widened significantly to $(62.5) million for the quarter compared to $(27.0) million in the prior year. The six-month loss was $(55.7) million versus a net income of $187.0 million in the prior year (which included a $198.2 million gain from the sale of IDT Entertainment).
• Bad Debt Spike: Bad debt expense surged to $19.0 million in the quarter and $21.3 million for the six months, compared to $1.5 million and $4.4 million in the prior year periods. This increase is largely attributed to IDT Carmel recording $16.1 million in bad debt due to challenging economic conditions affecting debt collections.
• Arbitration Award: The company recorded a $40.0 million gain in the six months ended January 31, 2008, from an arbitration award against Altice One S.A. regarding terminated cable telephony license agreements. This amount is included in operating income but has not yet been received in cash.
• Segment Performance:
  • IDT Telecom: Revenues declined 13.6% (quarter) and 14.1% (six months). Minutes of use declined 2.7% and 1.6% respectively.
  • IDT Energy: Revenues increased 25.3% (quarter) and 21.5% (six months) due to higher electricity and natural gas consumption and rates, though operating income declined due to rising costs.
  • IDT Carmel: Revenues increased significantly (715% for six months) due to a change in accounting method from cost recovery to effective yield, but the segment reported an operating loss of $(10.2) million for the six months due to bad debt provisions.

Guidance, Outlook, and Risks

• Outlook: Management expects further declines in calling card revenues in fiscal 2008, with gains in emerging markets (Latin America, Asia) outweighed by continued declines in the U.S. IDT Energy expects revenue growth to continue, though at a lower rate than fiscal 2007.
• Capital Expenditures: Anticipated capital expenditures for the remainder of fiscal 2008 (excluding the headquarters purchase) are in the $9 million to $11 million range.
• Strategic Investments: The company entered a binding Letter of Intent to acquire a 75% interest in E.G.L. Oil Shale, L.L.C., committing at least $8.5 million in 2008 and 2009 for research and development. Total anticipated investment in the oil shale industry is at least $50 million.
• Legal Proceedings:
  • Tyco Litigation: An appeal regarding a summary judgment on liability is pending; proceedings are stayed until the appeal is decided.
  • Skype/eBay Litigation: IDT is suing Skype for patent infringement, while eBay has filed a counter-suit alleging IDT infringes on eBay's patent.
  • IRS Audit: The IRS is auditing federal tax returns for fiscal years 2001–2004. An assessment could result in significant tax liabilities, interest, and penalties.
• Accounting Changes: The company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) effective August 1, 2007, resulting in a one-time decrease in retained earnings of $19.8 million and a reclassification of deferred tax liabilities.

Key Facts for Investor Verification

• Cash Collection of Arbitration Award: Verify the status of the $40.0 million arbitration award from Altice One S.A., which is recorded as a receivable but not yet received.
• IDT Carmel Bad Debt Provisions: Assess the sustainability of IDT Carmel's revenue model given the $16.1 million bad debt charge and the company's admission that the current economic environment is challenging for debt collection.
• Telecom Revenue Trends: Monitor the continued decline in calling card minutes-of-use and the effectiveness of pricing strategies in the U.S. and European markets.
• IRS Audit Outcome: Track the resolution of the IRS audit for fiscal years 2001–2004, as potential assessments could materially impact future cash flows and financial condition.
• Oil Shale Investment Viability: Evaluate the risks associated with the new $50 million commitment to oil shale ventures, which are in the research and demonstration phase.