IDT

IDT Corporation 10-Q Summary: Period Ended January 31, 2009

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended January 31, 2009 (the second quarter of fiscal year 2009). IDT Corporation is a multinational holding company with principal businesses in telecommunications (IDT Telecom), energy services (IDT Energy), local media, and alternative energy. The company is currently classified as a "smaller reporting company." During the period, IDT executed a one-for-three reverse stock split effective February 24, 2009, to address NYSE listing compliance issues regarding market capitalization and stock price.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 5.8% for the three months and 5.7% for the six months compared to the prior year periods. This was primarily driven by a 14.0% decline in IDT Telecom revenues due to lower minutes of use and competitive pricing pressures, partially offset by a 44.3% increase in IDT Energy revenues.
• Restructuring and Impairment: Charges increased significantly to $16.8 million (three months) and $18.5 million (six months) compared to $2.4 million and $4.2 million in the prior year. This included $10.6 million in impairment charges related to goodwill, FCC licenses, and a building in Israel.
• Discontinued Operations: The company sold its IDT Carmel debt portfolios for $18.0 million, recognizing a $34.3 million loss. This unit is now reported as discontinued operations, contributing significantly to the net loss.
• Cost Reductions: Selling, general, and administrative (SG&A) expenses decreased 37.3% (three months) and 27.8% (six months) due to headcount reductions and facility consolidations.

Guidance, Outlook, and Risks

• Liquidity: Management expects existing cash, marketable securities, and investment vehicles to be sufficient to meet working capital and capital expenditure requirements for at least the next twelve months. However, the company has an accumulated deficit of $195.7 million and has incurred losses from continuing operations for five consecutive years.
• NYSE Compliance: The company received notices of non-compliance with NYSE listing standards (market cap and stock price). A compliance plan was accepted, with a deadline of March 2010 to regain the $100 million market cap standard. The stock price standard was suspended by the NYSE until June 30, 2009.
• Goodwill Impairment: Management identified indicators of goodwill impairment in the second quarter. A preliminary impairment of $1.8 million was recorded for IDW Publishing. Further analysis is ongoing, and additional material impairments could be recorded in the third quarter of fiscal 2009.
• Tax Liabilities: The company is in an installment agreement with the IRS to pay approximately $18 million remaining from a prior audit by mid-June 2009. Additionally, the company faces ongoing VAT audits in Europe, including a Swedish assessment of approximately $13.5 million plus penalties.
• Internal Controls: The company disclosed a material weakness in internal controls regarding the testing for impairment of goodwill and intangible assets, which has not yet been remediated.

Investor Verification Checklist

• Goodwill Impairment Status: Verify the final outcome of the goodwill impairment analysis expected in Q3 fiscal 2009, as additional charges could be material.
• NYSE Listing Status: Monitor progress on the compliance plan to avoid delisting procedures.
• Tax Resolution: Confirm the settlement of the IRS installment agreement and the outcome of the Swedish VAT audit.
• Discontinued Operations: Review the final cash proceeds and tax implications of the IDT Carmel sale.
• Internal Control Remediation: Assess the timeline and effectiveness of the remediation plan for the material weakness in financial reporting controls.