IDT Corporation — Q2 FY2019 Form 10-Q
Business context and reporting period
The quarter ended January 31, 2019, was IDT’s second quarter of fiscal 2019. IDT provides telecommunications and payment services, primarily through Telecom & Payment Services, and cloud communications and related services through net2phone. Financial statements are unaudited; amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Quarter ended Jan. 31, 2019 | Prior-year quarter | Six months ended Jan. 31, 2019 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $349.5 | $395.9 | $711.8 | $789.4 |
| Operating income (loss) | $1.5 | ($0.5) | $2.8 | ($0.4) |
| Net income (loss) attributable to IDT | $0.2 | $1.5 | ($1.3) | ($0.6) |
| Basic and diluted EPS | $0.01 | $0.06 | ($0.05) | ($0.02) |
| Operating cash flow | — | $38.0 | ($23.3) |
- Quarterly revenue fell 11.7% year over year; six-month revenue fell 9.8%. Operating margin was approximately 0.4% in the quarter and 0.4% for the six-month period.
- Cash and cash equivalents were $74.4 at January 31, and debt securities were $1.1. Management reported $75.5 of cash, cash equivalents and debt securities, a $20.4 working-capital deficit, and expected these resources and operating cash flow to meet anticipated needs through January 31, 2020.
- Cash, cash equivalents and restricted cash at period-end totaled $239.3, including $158.9 of restricted cash held within the Gibraltar financial-services business classified as held for sale. IDT also said $13.9 of IDT Payment Services cash was unavailable for other purposes.
- Six-month investing cash flow was a $9.8 use; financing cash flow was $8.1 provided. Capital expenditures were $9.4. The company had no revolving-credit borrowings outstanding at January 31 and had a $25.0 facility maturing July 15, 2019.
- At January 31, total assets were $416.1, total liabilities $362.9 and total equity $53.2. Liabilities include $159.7 classified as held for sale.
Material changes versus the prior comparable period
- Telecom & Payment Services revenue declined 12.7% in the quarter and 10.7% over six months, while segment operating income increased to $6.2 and $11.5, respectively.
- Carrier Services revenue fell 25.1% in the quarter and 20.5% over six months. Boss Revolution Calling revenue declined 7.2% and 6.9%, respectively. Mobile Top-Up revenue grew 3.5% and 4.9%.
- Growth initiatives increased: Telecom & Payment Services growth revenue rose 39.8% in the quarter and 37.7% over six months. Boss Revolution money-transfer direct-to-consumer revenue increased 145% and 152%; National Retail Solutions revenue increased 56% and 61%.
- net2phone revenue grew 38.8% in the quarter and 36.7% over six months, but its operating loss widened to $1.9 and $3.4, respectively, as selling, general and administrative and depreciation expenses increased. UCaaS revenue grew 86.4% in the quarter and 92.4% over six months.
- Operating cash flow improved from a use of $23.3 to cash provided of $38.0, with movements in receivables, payables and customer deposits among the drivers. The comparison also reflects adoption of a new cash-flow presentation standard.
Outlook, commentary, risks and unusual items
- Management expects $19–$22 of capital expenditures for the 12 months ending January 31, 2020, funded from operating cash flow and available cash and securities. No specific revenue or earnings guidance is provided.
- Management cited market-wide pressure on traditional calling from wireless unlimited plans and over-the-top services. It expects Carrier Services to face the long-term shift away from traditional international long-distance operators; volumes and revenue may fluctuate as the company prioritizes economics.
- IDT adopted ASC 606 on August 1, 2018. The adoption reduced opening deferred revenue and accumulated deficit by $8.6; a second-quarter correction deferred $1.3 of net2phone contract costs. Prior-year results were not restated, limiting direct comparability.
- The proposed sale of IDT Financial Services Holding to JAR Fintech was considered terminated by the buyer in October 2018. Parties remain interested but are waiting for greater certainty on Brexit before renegotiating terms. The business remains classified as held for sale and was not presented as discontinued operations.
- Brexit could affect IDT Financial Services’ ability to serve EU customers: its Gibraltar bank’s EU passporting rights may cease, and IDT is seeking an EU e-money license without assurance of timing or approval.
- An audit of FCC regulatory fees was ongoing. Accrued expenses included $45.0 for the audited year and other years. The filing does not quantify any potential additional liability.
- Other matters include a Straight Path stockholder lawsuit, for which the Delaware Supreme Court affirmed denial of a motion to dismiss in February 2019; the company says potential liability cannot currently be estimated. A Do Not Call class action also remains pending. IDT intends to defend these matters.
- Purchase commitments were $22.9, including $20.1 under a reciprocal-services agreement; performance bonds totaled $17.1. The company reported no material change to previously disclosed risk factors other than Brexit-related risks.
- On December 21, 2018, IDT sold 2.55 million treasury shares to Chairman Howard S. Jonas for $14.8 at $5.89 per share. In the six months, it also repurchased 729,110 Class B shares for $3.9 under its repurchase program.
Important facts for investors to verify
- Whether the steep Carrier Services decline and continued traditional-calling pressures affect future segment profitability.
- The status and terms of the proposed IDT Financial Services sale, and the consequences of Brexit or delayed EU licensing for that business.
- The outcome of the FCC regulatory-fee audit and the basis for the $45.0 accrued balance.
- How much reported cash is usable for general purposes, given restricted balances and the held-for-sale financial-services business, and how the working-capital deficit evolves.
- Developments in the Straight Path and Do Not Call litigation, and any resulting exposure not currently estimable.
- The rationale and governance around the related-party share sale to the chairman, including its pricing and approvals.