IDT Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2012. Amounts are U.S. dollars; financial figures are in millions unless noted.
Business context
IDT is primarily a telecommunications holding company. Telecom Platform Services and Consumer Phone Services make up IDT Telecom; other businesses include Zedge, Fabrix, wireless spectrum and real estate. Genie Energy was spun off to shareholders on October 28, 2011 and is presented as discontinued operations.
Financial performance and liquidity
- Third-quarter revenue: $379.7, up 11.6% from $340.2. Gross profit was $59.9 versus $57.6; gross margin was approximately 15.8%, down from 16.9%.
- Third-quarter earnings: Operating income was $2.2 versus $0.3. Continuing-operations income was $3.4 versus $5.2; net income attributable to IDT was $3.0 versus $7.0. Diluted EPS was $0.14 versus $0.31.
- Nine-month results: Revenue was $1,121.9, up 13.2%. Operating loss was $4.9 versus operating income of $10.5; continuing-operations loss attributable to IDT was $2.6 versus income of $22.1. Net income attributable to IDT was $1.3 versus $26.6, including $3.9 of discontinued-operations income in 2012.
- Cash flow, nine months: Operating cash flow was $31.0, investing cash flow provided $5.4, and financing used $119.2. Financing included the Genie spin-off cash deconsolidation and $11.6 of dividends. Cash and cash equivalents ended at $156.5, down from $244.3 at the period start; the filing attributes much of the reduction to the spin-off.
- Balance sheet: Total debt was approximately $30.2, comprising $0.5 current and $29.7 long-term notes payable. Cash was $156.5, with an additional $17.1 restricted. Working capital was negative $20.0; current liabilities included $80.3 of deferred revenue, which management noted does not require cash settlement.
- Capital returns and investment: IDT paid $0.51 per share in dividends during the nine months and declared a further $0.15 per share dividend in June. Capital expenditures were $7.4; management forecast $10.0–$12.5 of capex for the twelve months ending April 30, 2013.
Changes versus prior year
- Telecom Platform Services revenue grew 12.3% in the quarter and 14.0% year to date. Total minutes of use rose 18.3% and 17.1%, respectively. Retail Communications and Wholesale Termination Services drove growth; Payment Services also expanded.
- Telecom Platform Services gross margin fell 1.1 percentage points in the quarter and 1.5 points year to date, reflecting lower-margin product mix and the loss of a high-margin cable telephony customer. Wholesale average revenue per minute declined, while Retail Communications average revenue per minute increased.
- Consumer Phone Services revenue declined 26.8% in the quarter and 27.5% year to date as the business remained in harvest mode. Management expects its customer base and revenue to continue declining.
- The nine-month comparison was affected by unusual items: a $5.3 gain on spectrum-license sales in 2012, a $6.5 estimated litigation charge in the quarter, and an $11.0 T-Mobile settlement loss year to date. The prior-year period included a $14.4 agreement-termination gain and a $5.4 auction-rate-securities settlement gain.
Outlook, risks and unusual items
- Management said cash on hand and expected operating cash flow should cover anticipated working-capital and capital needs for the next twelve months. It also anticipated continuing quarterly dividends subject to results, resources and strategy. No formal revenue or earnings guidance was provided.
- Management expects continued pressure on traditional calling-card sales and pricing, and ongoing decline in Hosted Platform Solutions revenue and gross profit. Growth initiatives include Boss Revolution Pinless, international platform expansion and international mobile top-up services; their growth and margins are not assured.
- Material legal exposures include the Alexsam patent matter: $10.0 accrued, with reasonably possible additional liability of $0–$3.0, potentially increasing with continued use of the products. The company also reported $18.5 accrued and $14.0 of reasonably possible exposure above accruals for Aerotel, Southwestern Bell, and Lycatel/Mox matters. The filing describes a $12.2 surety bond for the Alexsam judgment.
- A Swedish VAT assessment of approximately $21.8 was overturned on appeal on May 22, 2012; the decision would become final if not appealed by July 16. IDT had not accrued a loss for the assessment.
- The company identified potential cybersecurity and IT disruption risks, and risk of failing to meet payment-network or regulatory requirements. It also disclosed a possible material impairment related to future use of its 520 Broad Street property, carried at $43.6 with a $22.8 mortgage.
- Other exposures include tax audits: $2.9 accrued, with possible Florida liability above accrual ranging from nil to approximately $2.4. Management reported effective disclosure controls and no material change in internal control during the quarter.
Key facts for investors to verify
- Whether Telecom Platform Services growth can offset falling margins, traditional calling-card declines and shrinking legacy businesses.
- Cash generation and liquidity after the Genie spin-off, dividends, restricted cash requirements and planned capex.
- Developments in the Alexsam, Southwestern Bell, Aerotel and Lycatel/Mox matters, including any liabilities beyond recorded accruals.
- Whether the Swedish tax appeal became final and whether other tax audits result in additional assessments.
- Management’s decisions on the 520 Broad Street property and any resulting impairment charge.