IDT Corporation — Form 10-Q Summary
Business context and reporting period
Fiscal third quarter and nine months ended April 30, 2014; the quarter is compared with the three months ended April 30, 2013, and the year-to-date period with the corresponding prior-year period. IDT is a multinational holding company, with most revenue from telecommunications. Its segments include Telecom Platform Services, Consumer Phone Services, Zedge, and All Other. Straight Path was spun off on July 31, 2013, and is reported as discontinued operations.
Key financial metrics
| Metric | Three months ended April 30, 2014 | Three months ended April 30, 2013 | Nine months ended April 30, 2014 | Nine months ended April 30, 2013 |
|---|---|---|---|---|
| Revenue | $403.8 million | $396.9 million | $1,230.9 million | $1,208.5 million |
| Operating income | $9.2 million | $15.7 million | $24.0 million | $28.0 million |
| Net income attributable to IDT | $5.0 million | $8.7 million | $11.1 million | $15.3 million |
| Diluted EPS | $0.22 | $0.39 | $0.48 | $0.69 |
| Operating cash flow | Not provided separately | Not provided separately | $29.6 million | $45.1 million |
- Gross profit, calculated as revenue less direct cost of revenue, was $71.4 million for the quarter and $212.9 million year to date. Corresponding gross margins were approximately 17.7% and 17.3%; prior-year margins were approximately 16.6% and 16.3%.
- Quarterly operating margin was approximately 2.3%, versus 4.0% a year earlier; nine-month operating margin was approximately 2.0%, versus 2.3%.
- At April 30, cash and cash equivalents were $147.0 million and marketable securities were $12.4 million. Restricted cash was $56.1 million, and a further $9.6 million of cash was treated as substantially restricted and unavailable for other purposes.
- Working capital was negative $29.6 million. Current liabilities were $340.5 million against current assets of $310.9 million.
- Debt included a $13.0 million revolving credit balance and $7.0 million of notes payable. The revolver was repaid on May 28, 2014; the $25.0 million facility matures January 31, 2015. IDT Telecom was in covenant compliance at quarter-end.
- Nine-month investing cash outflow was $14.0 million, including $12.4 million of capital expenditures; financing cash outflow was $20.7 million. Cash and cash equivalents declined $4.6 million over the period.
Material changes versus the prior comparable periods
- Revenue grew 1.7% in the quarter and 1.8% year to date, but IDT-attributable net income fell 42.3% and 27.4%, respectively.
- Operating income declined partly because the prior-year quarter included $9.6 million of legal-related operating gains; nine-month legal-related gains were $0.7 million this year versus $9.3 million last year.
- Other income also weakened: a foreign currency transaction loss of $4.8 million year to date, compared with a $3.6 million gain in the prior-year period, contributed to lower earnings.
- Telecom Platform Services revenue grew, led by Retail Communications, while Wholesale Termination Services declined year to date. Consumer Phone Services revenue fell about 24% in both periods as the business continues to operate in harvest mode.
- Zedge revenue grew 14.4% year to date, but its quarterly operating result shifted to a small loss. Fabrix revenue increased, though its nine-month operating loss widened.
- Operating cash flow declined from $45.1 million to $29.6 million year to date. Dividends paid were $9.7 million, versus $17.1 million in the prior-year period.
Outlook, management commentary, risks and unusual items
- Management expected cash from operations and cash, cash equivalents and marketable securities on hand to meet anticipated working capital and capital expenditure needs through April 30, 2015. Planned capital expenditures for that 12-month period were $16 million to $18 million. No specific earnings or revenue guidance was provided.
- Management expects customer deposits and associated restricted cash at IDT Financial Services to continue increasing. These balances are not freely available for general corporate purposes.
- Management cited ongoing migration from traditional prepaid calling cards to wireless and IP-based services, continued pricing pressure, competition in payment services, and expected further decline in Consumer Phone Services customers and revenue. Growth in Boss Revolution and other newer offerings is not assured.
- The carrying value of the 520 Broad Street property was $37.3 million. Potential disposition or changes in use could result in an additional, potentially material impairment loss.
- Contingencies include the obligation to reimburse Straight Path for certain pre-spin-off liabilities; the estimated liability was $1.8 million at April 30, 2014. The company also reported a $1.2 million accrual related to German patent proceedings and an unreleased court security deposit in the Mox matter.
- The company settled the Alexsam litigation for an undisclosed settlement amount in October 2013 and paid Aerotel $5.4 million in July 2013. The Second Circuit affirmed the Aerotel award in June 2014. On June 5, 2014, the New York Court of Appeals reversed an appellate ruling in the Tyco dispute; IDT said it was evaluating its options.
- Foreign currency exposure is relevant: international operations represented 30% of continuing-operation revenue year to date, compared with 23% a year earlier. Management said net exposure at period-end was generally not material, but reported currency losses affected results.
- The filing reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective as of April 30, 2014.
Important facts for investors to verify
- Whether revenue growth in newer retail and payment offerings can offset declines in legacy calling products, wholesale traffic and Consumer Phone Services.
- How much of reported cash and liquidity is available after accounting for restricted and substantially restricted balances, customer deposits, and the working capital deficit.
- The cash-flow outlook, planned capital spending, dividend commitments, and use of the revolving facility ahead of its January 2015 maturity.
- Potential further impairment of the 520 Broad Street property and the ultimate cost or recovery of the Straight Path, German patent, Mox and Tyco matters.
- The magnitude and persistence of currency-related gains or losses and the contribution of nonrecurring legal and insurance items to reported earnings.