IDT Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended July 31, 2018; fiscal Q4 ended July 31, 2018. Unless otherwise noted, amounts are U.S. dollars. This is an annual report, not a standalone quarterly filing.
Business context
IDT operates primarily in telecommunications and payments. Its two reportable segments are Telecom & Payment Services (TPS), which includes retail calling, wholesale carrier services and payment products, and net2phone-UCaaS, which provides business communications services. TPS generated 97.7% of consolidated revenue. The company completed the pro rata spin-off of Rafael Holdings on March 26, 2018; Rafael’s results and balances were not classified as discontinued operations.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $1,547.5 million | $1,501.7 million |
| Income from operations | $8.4 million | $5.5 million |
| Net income | $5.2 million | $9.6 million |
| Net income attributable to IDT | $4.2 million | $8.2 million |
| Diluted EPS | $0.17 | $0.35 |
| Cash provided by operating activities | $6.9 million | $19.0 million |
- Revenue rose 3.0%; operating income improved from a low base, while net income attributable to IDT fell 48.5%.
- Direct costs were 84.4% of revenue, versus 85.0% in FY2017. Operating margin was approximately 0.5% in FY2018.
- TPS revenue was $1,511.5 million and operating income was $25.8 million. net2phone-UCaaS revenue grew 18.4% to $34.9 million, but its operating loss widened to $2.7 million.
- At July 31, cash, cash equivalents and marketable securities totaled $74.1 million; working capital was negative $38.1 million. The filing says cash from operations and available cash were expected to cover anticipated FY2019 working capital and capital needs. It also identifies $10.7 million of payment-services cash as unavailable for other purposes.
- Capital expenditures were $20.6 million, making operating cash flow less capital expenditures approximately negative $13.7 million. FY2019 capital expenditures were estimated at $20–$23 million.
- No long-term debt was reported. The $25 million revolving credit facility was terminated July 20, 2018; the company borrowed and repaid $22.3 million during FY2018.
Material changes and unusual items
- Retail Communications revenue declined 5.4% to $582.3 million, and minutes fell 17.2%. Wholesale Carrier Services revenue increased 6.0% to $645.5 million; Payment Services grew 15.7% to $283.7 million.
- TPS minutes of use declined 3.9% overall. Management attributed retail weakness to competition from unlimited mobile plans and internet-based calling and messaging, alongside declines in some international markets and traditional calling cards.
- FY2018 included $4.6 million of severance expense related mainly to workforce reductions. A $3.3 million tax benefit related to an anticipated alternative minimum tax credit refund was recorded; the Tax Cuts and Jobs Act accounting remained provisional.
- In Q4, a change in estimates for prepaid-service breakage recognition increased revenue by $9.5 million. A concurrent change in estimated regulatory fee expense increased direct costs by $4.5 million. Q4 revenue was $392.6 million, operating income $10.5 million and net income attributable to IDT $8.2 million.
- The Rafael spin-off reduced reported total assets to $399.6 million from $519.0 million, including deconsolidation of $9.3 million of cash and $105.6 million of net assets excluding cash. Shareholders received Rafael shares pro rata.
- The board discontinued quarterly dividends after FY2018 Q3, citing a preference for opportunistic repurchases and investment in early-stage initiatives. FY2018 dividends paid totaled $13.9 million; the company repurchased 367,484 shares under its program for $1.9 million.
Outlook, risks and contingencies
- Management expected FY2019 operating cash and July 31, 2018 cash and securities to meet anticipated working capital and capital expenditure needs. No specific revenue or earnings guidance was provided.
- Growth initiatives include Boss Revolution money transfer and airtime top-up, National Retail Solutions’ POS network and net2phone’s UCaaS expansion. NRS had deployed more than 5,600 terminals as of September 30, 2018. After year-end, net2phone acquired Versature for $6.9 million.
- The planned sale of the Gibraltar-based bank remained subject to regulatory approval and other conditions; the filing cautions there is no assurance it will close. Its assets and liabilities were classified as held for sale.
- A $43.9 million accrual for regulatory fees was included in accrued expenses while the company’s FCC Form 499-A was under audit. The filing notes possible interest and penalties if amounts were calculated incorrectly.
- Purchase commitments totaled $56.9 million, including $55.4 million under a Central American telecom reciprocal-services agreement. The company had deposited $9.2 million in escrow as security. Outstanding performance bonds totaled $15.8 million.
- Material risk areas include intense telecom price competition and declining retail calling demand, wholesale customer collection risk, reliance on third-party service platforms and carriers, cybersecurity and privacy, money-transmission regulation, and foreign-currency and investment exposure.
- Legal matters include a putative Do Not Call class action and a Straight Path shareholder action; the company stated it could not estimate potential liability in these matters. Sprint dismissed its patent complaint without prejudice. A separate marketing-message class action was dismissed by stipulation.
Key facts for investors to verify
- Whether growth in Payment Services and wholesale services can offset the continuing decline in retail calling volume and revenue.
- Whether FY2018 operating cash flow weakness, the working-capital deficit and substantial near-term commitments affect liquidity despite management’s FY2019 sufficiency assessment.
- The outcome and potential financial impact of the FCC regulatory-fee audit and related $43.9 million accrual.
- Whether the Gibraltar bank sale closes, and the implications if it does not.
- The sustainability of Q4 results, given the $9.5 million breakage estimate change and the $3.3 million tax benefit recorded during the year.
- Approval and completion of the proposed $15 million Class B share purchase by Howard S. Jonas, a controlling stockholder; the proposal was subject to stockholder approval.