IDT

IDT Corporation 10-Q Summary: Period Ended January 31, 2002

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended January 31, 2002, and the six months ended on that date. IDT Corporation operates as a holding company with primary subsidiaries IDT Telecom, Inc. (wholesale and retail telecommunications) and IDT Media, Inc. (formerly IDT Ventures, focusing on radio, technology, and print media). On December 19, 2001, IDT acquired certain U.S. voice and data assets of Winstar Communications, Inc., which is managed as a separate segment. The company provides prepaid calling cards, domestic long distance, and wholesale carrier services globally.

Key Financial Metrics

Note: Net income for the six months ended Jan 31, 2002, includes a non-cash cumulative effect of accounting change charge of $147.0 million related to goodwill impairment under SFAS No. 142. Excluding this charge, the loss before cumulative effect was $28.5 million.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 26.4% year-over-year for the six-month period, driven by a 61.4% increase in retail telecommunications services (calling cards and domestic long distance) and the inclusion of Winstar revenues ($19.2 million). Wholesale revenues declined 33.4% due to a strategic shift toward larger, more stable customers.
• Operating Performance: Operating loss improved significantly from $108.5 million to $40.3 million for the six-month period. Telecommunications operations turned profitable with $4.1 million in operating income, compared to a $52.5 million loss in the prior year, due to improved gross margins and efficiency.
• Accounting Change: The company adopted SFAS No. 142 early, ceasing goodwill amortization and recording a one-time impairment charge of $147.0 million (net of tax) as a cumulative effect adjustment.
• Segment Shift: Media/Ventures revenues decreased 26.2% as the company exited dial-up and DSL internet access businesses to focus on radio and print media.

Guidance, Outlook, and Risks

Outlook: Management anticipates a continued shift in revenue mix toward retail products. While telecom minutes of use are growing strongly, average revenue per minute is declining due to intense price competition. The company expects to continue incurring significant costs for new Media/Ventures initiatives, with expenses potentially exceeding revenues for the foreseeable future.

Capital Resources: IDT holds approximately $1.1 billion in cash, cash equivalents, and marketable securities. Management believes these resources are sufficient to meet working capital and capital expenditure needs for at least the next 12 months. Capital expenditures were $16.1 million for the six months ended Jan 31, 2002.

Risks and Contingencies:

• Winstar Integration: IDT has until April 17, 2002, to decide which contractual liabilities to assume from the Winstar acquisition. A subsequent event noted that Winstar is implementing a strategic plan involving the elimination of approximately 65% of its non-sales workforce.
• Legal Proceedings: Ongoing litigation against Telefonica S.A. and Terra Networks regarding submarine cable agreements and contract breaches. A final arbitration hearing is scheduled for April 8, 2002.
• AT&T Guarantee: IDT guaranteed the value of approximately 1.4 million shares of IDT Class B stock retained by AT&T. If the value falls below $27.5 million by October 19, 2002, IDT must pay the difference. The company recorded a net charge of $5.9 million related to this obligation in the six-month period.

Investor Verification Checklist

• Goodwill Impairment: Verify the impact of the $147.0 million non-cash charge on net income and the methodology used for the SFAS No. 142 impairment test.
• Winstar Liability Assumption: Monitor the April 17, 2002, deadline for IDT's decision on which Winstar contractual liabilities to assume, as this could materially affect future obligations.
• AT&T Stock Guarantee: Track the market value of IDT Class B common stock relative to the $27.5 million threshold to assess potential future cash outflows.
• Margin Pressure: Analyze the trend of average revenue per minute versus carrier costs to determine if gross margin improvements are sustainable amidst price competition.
• Media/Ventures Burn Rate: Review the trajectory of expenses versus revenues for the Media/Ventures segment to assess the duration of cash burn before profitability.