IDT Corporation — FY2015 Form 10-K
Business context and reporting period: This annual report covers the fiscal year ended July 31, 2015; it is not a standalone Q4 filing. IDT is a multinational holding company focused primarily on telecommunications and payment services. IDT Telecom generated 99.0% of continuing-operations revenue. Its principal offerings include Boss Revolution calling and payment services, wholesale call termination, and Net2Phone hosted communications. The filing also reports Zedge, real estate, and other holdings.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $1,596.8 million | $1,651.5 million |
| Operating income | $93.1 million | $29.8 million |
| Income from continuing operations | $86.1 million | $21.0 million |
| Net income attributable to IDT | $84.5 million; diluted EPS $3.63 | $18.8 million; diluted EPS $0.82 |
| Cash from operating activities | $30.5 million | $45.7 million |
| Capital expenditures | $28.6 million | $17.0 million |
- FY2015 operating income included a $76.9 million gain on the sale of Fabrix. Excluding that gain, operating income was approximately $16.2 million, versus $29.8 million in FY2014.
- Direct costs were 83.2% of revenue, compared with 82.8% a year earlier; selling, general and administrative expenses were 13.9% of revenue in both years.
- Telecom Platform Services revenue declined 2.7% to $1,572.7 million, and operating income fell 40.2% to $27.0 million. Retail Communications revenue rose 4.8% to $729.1 million; wholesale revenue fell 11.2% to $596.8 million; Payment Services revenue rose 3.0% to $208.3 million; Hosted Platform Solutions revenue fell 14.9% to $38.5 million.
- For the quarter ended July 31, 2015, revenue was $405.8 million, operating income $7.2 million, net income $1.9 million, and net income attributable to IDT $1.3 million, or $0.05 per diluted share.
- At July 31, cash and cash equivalents were $110.4 million and marketable securities $40.3 million. Short-term restricted cash was $91.0 million; the company reported a $7.7 million working-capital deficit. Some cash held by payment and banking subsidiaries was substantially restricted.
- There was no revolving-credit borrowing at year-end; the facility provides up to $25 million. A $6.4 million mortgage note was current at year-end and was repaid at maturity on September 1, 2015. Total liabilities were $350.7 million.
- Operating cash flow less capital expenditures was approximately $2.0 million. Cash declined by $43.5 million during the year, including $47.6 million of dividends paid and $7.5 million used to repurchase shares from the chairman.
Material changes, outlook and risks
- Revenue decreased 3.3% year over year, while reported earnings rose sharply chiefly because of the Fabrix sale, not improved core operating performance. IDT received $59.7 million of its $68.1 million share of sale proceeds by year-end and reported an $8.5 million receivable; proceeds were also subject to escrow arrangements.
- Retail Communications growth was led by Boss Revolution, while traditional calling cards and some international retail markets continued to decline. Wholesale revenue was pressured by lower-revenue traffic mix and reduced Latin American arbitrage opportunities. Management cited strong price competition and ongoing pressure from internet-based calling and mobile unlimited international plans.
- Consumer Phone Services remained in harvest mode; management expected its customer base and revenue to continue declining in FY2016. Zedge revenue increased to $9.1 million from $6.5 million, with operating income of $0.1 million versus $0.3 million.
- Management expected FY2016 operating cash flow and year-end cash, cash equivalents and marketable securities to cover anticipated working capital and capital needs. Planned FY2016 capital expenditures were approximately $19–21 million. The company expected regular quarterly distributions consistent with cash generation, resources, outlook and strategy; it declared a $0.18-per-share FY2015 fourth-quarter dividend after year-end.
- In August 2015, the board approved a preliminary plan to separate IDT Telecom, Zedge and other holdings, targeting completion in calendar 2016. The plan remained subject to change, board approval and third-party contingencies.
- Material exposures include a $49.9 million accrual for disputed Universal Service Fund regulatory fees, with a review still pending; customer and receivables concentration (the five largest receivables represented 24.1% of gross receivables); and legal, regulatory, money-transfer compliance, cybersecurity, foreign-exchange and investment risks. IDT also filed a renewed Tyco lawsuit; Tyco moved to dismiss it in September 2015.
- The company reported effective disclosure controls and internal control over financial reporting; Grant Thornton issued unqualified opinions on the financial statements and internal controls.
Investor facts to verify
- How much of FY2015 earnings and cash generation is sustainable after separating the Fabrix gain and special dividends from recurring operations?
- Whether the $8.5 million Fabrix receivable and escrow amounts were collected or released, and whether any post-closing claims arose.
- The outcome and potential financial impact of the USAC fee dispute and the basis for the $49.9 million accrual.
- Progress, approvals, financing implications and any revised terms for the proposed three-way separation.
- Whether Boss Revolution and Payment Services growth can offset continuing wholesale, hosted-services and legacy consumer-phone declines, while sustaining margins and cash flow.