IDT

Business Context and Reporting Period

IDT Corporation is a multinational holding company with primary operations in telecommunications and energy. The fiscal year ended July 31, 2010. The company operates through four reportable segments: Telecom Platform Services (prepaid calling cards, VoIP, wholesale carrier services), Consumer Phone Services (local/long distance), IDT Energy (reselling electricity and natural gas), and Genie Oil & Gas (shale oil initiatives in Colorado and Israel). The company also holds assets in "All Other" (including Zedge.net and Fabrix T.V.).

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Turnaround: The company returned to profitability with $20.3 million in net income, compared to a $155.4 million net loss in fiscal 2009. This improvement was driven by a $75.5 million increase in operating income.
• Revenue Decline: Total revenues decreased 7.0% to $1.401 billion. IDT Telecom revenues fell 3.5% due to aggressive pricing competition, while IDT Energy revenues dropped 23.9% due to lower commodity costs and reduced consumption.
• Cost Reductions: Total costs and expenses decreased 11.2% to $1.379 billion. Selling, general, and administrative (SG&A) expenses dropped 22.5% due to cost-saving programs and workforce reductions.
• Impairments: Fiscal 2009 included $38.4 million in impairment charges (primarily goodwill and FCC licenses). No impairments were recorded in fiscal 2010.
• One-Time Gains: Fiscal 2010 included a $10.0 million gain from the settlement of litigation regarding misleading marketing practices by competitors.

Guidance, Outlook, and Risks

• Outlook: Management expects operations in the next twelve months to be sufficient to meet working capital and capital expenditure requirements. Capital expenditures for fiscal 2011 are anticipated to be between $7.5 million and $12.5 million.
• Telecom Segment: The company faces intense price competition and a shift toward wireless and IP-based services, which erodes pricing power. The Consumer Phone Services segment remains in "harvest mode" with declining customers.
• Energy Segment: IDT Energy is expanding into New Jersey and Pennsylvania. Margins are subject to volatility based on commodity prices and weather conditions.
• Genie Oil & Gas: The company has no current production. Success depends on developing in-situ shale oil technology in Colorado (AMSO) and Israel (IEI). A pilot test in Colorado is planned for calendar 2011.
• Legal and Regulatory Risks:
  • Aerotel Litigation: Aerotel filed a Notice of Arbitration seeking at least $25 million in damages related to a prior settlement. The company has a remaining accrual of $14.6 million.
  • Tax Audits: Significant audits are ongoing, including a Swedish VAT assessment of approximately $15.5 million plus penalties, and U.S. federal/state audits. The company has accrued $21.1 million for regulatory fees related to Universal Service Fund disputes.
  • Environmental Challenges: IEI's Israeli shale oil license is subject to a legal challenge by the Israel Union for Environmental Defense.

Key Facts for Investor Verification

• Liquidity Position: Verify the sufficiency of the $233.8 million in cash, cash equivalents, and marketable securities to fund operations and the $6.1 million estimated maximum exposure to additional loss in the AMSO, LLC shale oil venture.
• Legal Contingencies: Monitor the outcome of the Aerotel arbitration and the Swedish VAT court proceedings, as adverse rulings could materially impact financial condition.
• Revenue Quality: Assess the sustainability of Telecom revenues given the 11.5% decline in average revenue per minute and the reliance on lower-margin International Mobile Top Up (IMTU) products for growth.
• Debt Covenants: Review the terms of the Preferred Supplier Agreement with BP and the mortgage on the headquarters building to ensure compliance with covenants.
• Stock Ownership: Note that Chairman Howard S. Jonas controls approximately 76% of the combined voting power, limiting the influence of other stockholders.