IDT Corporation — Q3 FY2021 Form 10-Q
Business context and period: The quarter ended April 30, 2021; IDT’s fiscal year ends July 31. This filing reports the three and nine months ended April 30, 2021, compared with the same periods in 2020. IDT reports Fintech, net2phone-UCaaS, and Traditional Communications. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $373.8 | $321.3 | $1,057.0 | $985.4 |
| Operating income | $13.9 | $3.8 | $40.0 | $3.7 |
| Net income (loss) | $36.4 | $0.4 | $58.0 | $(0.1) |
| Net income (loss) attributable to IDT | $36.3 | $0.5 | $57.7 | $(0.1) |
| Diluted EPS | $1.39 | $0.02 | $2.23 | $(0.00) |
- Q3 operating margin was approximately 3.7% versus 1.2% a year earlier; nine-month operating margin was 3.8% versus 0.4%. Direct costs were 80.5% of Q3 revenue, approximately unchanged year over year.
- Net income included a $18.6 million income tax benefit in Q3 and $12.1 million for the nine months. IDT released $24.0 million of deferred-tax valuation allowance during the nine-month period, citing recent U.S. profitability and expected future U.S. and U.K. taxable income.
- Other income included investment gains of $5.4 million for Q3 and $5.8 million for nine months, partly offset in Q3 by a $1.1 million foreign-currency transaction loss. These items, along with the tax benefit, materially affected reported earnings.
- Operating cash flow was $38.1 million for nine months, versus cash used of $70.6 million in the prior-year period. Investing used $46.8 million and financing used $4.2 million. Cash, cash equivalents and restricted cash totaled $195.0 million at April 30, including $111.0 million restricted for customer deposits at IDT’s Gibraltar-based bank.
- Management reported $127.6 million of cash, cash equivalents, debt securities and unrestricted current equity investments, and working capital of $26.7 million. It said these resources and expected operating cash flow should cover anticipated working capital and capital expenditure needs for the 12 months through April 30, 2022.
- No funded debt was reported at April 30. Operating lease liabilities totaled $8.6 million. A subsidiary subsequently entered into a secured revolving credit facility of up to $25 million, maturing in May 2024.
Material changes and segment performance
- Traditional Communications: Q3 revenue rose 15.9% to $345.9 million and operating income increased to $20.1 million from $9.5 million. Mobile Top-Up revenue grew 55.8% to $132.6 million; BOSS Revolution Calling revenue declined 1.0% to $111.4 million; Carrier Services revenue rose 1.4% to $88.6 million. For nine months, Carrier Services revenue fell 12.9% and its minutes of use fell 29.4%, reflecting structural migration away from international voice and pandemic-related shifts to video and collaboration tools.
- Fintech: Q3 revenue increased 13.3% to $16.6 million, but the segment recorded a $1.4 million operating loss versus $0.1 million operating income. BOSS Revolution Money Transfer revenue declined 13.2% in Q3 as favorable foreign-exchange conditions subsided; NRS revenue increased 122.7% with POS network expansion and growth in payment processing and advertising. Nine-month segment revenue rose 62.5% and operating income was $1.5 million.
- net2phone-UCaaS: Q3 revenue grew 38.9% to $11.3 million, while the operating loss was $3.7 million. Seats increased 51% year over year to 210,000; quarterly subscription revenue grew 39.4% to $10.7 million. Management cited growth across regions, led by the U.S., and product integrations and geographic expansion.
- Consolidated revenue growth was led by Mobile Top-Up and the expanding Fintech and UCaaS businesses. Management also attributed the increase in operating income to stronger Traditional Communications results, lower corporate and certain segment expenses, and favorable changes in other operating items.
- Nine-month investing included $13.5 million of capital expenditures, $5.0 million invested in Rafael securities plus $1.0 million to exercise a warrant, and $4.0 million invested in an equity-method investee. IDT repurchased $2.8 million of shares under its program during the period.
Outlook, risks and unusual items
- Management estimated capital expenditures of $18–$20 million for the 12 months ending April 30, 2022, expected to be funded from operating cash flow and available financial resources. The filing provides no revenue or earnings forecast.
- COVID-19 had mixed effects. Management said digital consumer transactions continued to grow, while Carrier Services remained exposed to declining traditional voice usage. It cautioned that pandemic impacts remained difficult to predict.
- Customer deposits at the Gibraltar bank declined partly after Brexit ended the bank’s EU passporting rights. IDT said it had arranged third-party alternatives for affected EU customers and was seeking an EU e-money license; loss of customers could reduce revenue. The filing also identifies broader Brexit uncertainty and currency and regulatory risks.
- FCC regulatory-fee audit exposure remains unresolved: accrued FCC-related fees were $41.6 million at April 30, 2021, covering the audit year and other years. IDT had received invoices totaling $4.7 million related to disputed preliminary findings and said it would not pay unless its appeal is unsuccessful.
- Other contingencies include a pending Straight Path-related class action, for which IDT could not estimate potential liability, and possible sales/use-tax assessments following the Wayfair decision. A California employment-law matter was seeking court approval of a settlement. IDT also disclosed a potential FCC action related to former subsidiary Straight Path Spectrum.
- The company cited upcoming STIR/SHAKEN requirements for carriers as a risk to telecommunications traffic and market conditions, including possible effects if foreign carrier partners do not comply. It said it anticipated meeting its obligations.
- Unusual earnings items included the $24.0 million valuation-allowance release, investment gains, and a $2.0 million gain from selling rights in a payment-card antitrust lawsuit. A recent acquisition included up to $0.5 million of contingent consideration tied to EBITDA targets.
Important facts for investors to verify
- How much of the reported profit and EPS is repeatable after separating the tax valuation-allowance release and investment gains from operating performance.
- Whether UCaaS seat and subscription growth can improve profitability, and whether Fintech can sustain growth while controlling operating costs.
- Whether Traditional Communications’ Mobile Top-Up growth offsets continuing declines in calling and Carrier Services usage and revenue.
- The availability of liquidity for general corporate use, distinguishing unrestricted funds from customer-related restricted cash and investment balances.
- Developments in the FCC fee audit and accrued exposure, Straight Path litigation, potential sales-tax liabilities, Brexit-related customer servicing, and STIR/SHAKEN implementation.
- Utilization, pricing and covenant terms of the subsequent $25 million secured revolving facility, and actual capital spending against management’s estimate.