IDT Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2018; fiscal year ends July 31. Amounts below are in U.S. dollars. The filing is unaudited.
Business context and results
IDT is a multinational holding company operating mainly in telecommunications and payments. Its reportable segments are Telecom Platform Services and net2phone-UCaaS. Telecom Platform Services accounted for nearly all revenue; it includes retail communications, wholesale carrier services, and payment services.
| Metric | Quarter ended Jan. 31, 2018 | Six months ended Jan. 31, 2018 |
|---|---|---|
| Revenue | $395.9 million; up 7.7% year over year | $789.4 million; up 7.2% |
| Operating income (loss) | $(0.5) million, versus $3.1 million income | $(0.4) million, versus $8.3 million income |
| Net income (loss) attributable to IDT | $1.5 million, versus $0.9 million | $(0.6) million, versus $22.8 million income |
| Basic EPS | $0.06, versus $0.04 | $(0.02), versus $1.00 |
| Operating cash flow | $(27.0) million for the six months, versus $(0.8) million |
Consolidated direct costs were about 85.2% of revenue in the quarter and 85.3% for the six months, each roughly 0.6 percentage points above the prior-year comparable period. The filing reports no separate consolidated gross-margin measure.
Cash, liquidity, debt, and capital allocation
- At January 31, cash and cash equivalents were $54.1 million and marketable securities were $46.2 million. Management reported these together as $100.3 million, and working capital of $1.1 million. IDT separately treated $10.0 million held by its payment-services subsidiary as substantially restricted; IDT Financial Services assets held for sale also include restricted customer funds.
- Total assets were $504.2 million and total liabilities $357.9 million. No borrowings were outstanding at period-end under the $25 million revolving facility, maturing January 31, 2020. IDT borrowed and repaid $19.1 million under it during the six-month period.
- Cash declined $35.7 million during the six months. Investing activities provided $0.9 million; financing activities used $10.2 million, including $9.4 million of dividends. Capital expenditures were $10.9 million.
- Management expected cash from operations and cash and marketable securities on hand to cover anticipated working capital and capital spending for the next 12 months. Planned capital expenditures for the 12 months ending January 31, 2019 were $21–$23 million.
Material changes versus prior periods
- Telecom Platform Services revenue grew 7.5% in the quarter and 7.0% for six months, but segment operating income fell 36.2% and 33.4%, respectively. Wholesale Carrier Services and Payment Services grew, while Retail Communications declined.
- Retail Communications revenue fell 6.1% in the quarter and 6.9% for six months; minutes declined 17.1% and 18.3%. Management attributed the trend to competition from wireless, alternative communications, and ongoing declines in several regions and traditional calling cards.
- Wholesale Carrier Services revenue increased 18.3% in the quarter and 18.6% for six months, supported by higher carrier traffic. Payment Services revenue increased 16.5% and 15.5%, respectively, with growth in airtime top-up, money transfers, and retail point-of-sale services.
- net2phone-UCaaS revenue grew 16.2% in the quarter and 12.7% for six months, but operating losses widened to $0.8 million and $1.5 million, respectively, as sales and technology investment increased.
- The six-month comparison was materially affected by a $16.6 million deferred-tax benefit recorded in the prior-year period for Elmion Netherlands. In the current quarter, IDT recorded a $3.3 million tax benefit related to anticipated refunds of alternative minimum tax credits; accounting for the Tax Act remained provisional.
- Operating cash use worsened to $27.0 million, reflecting working-capital outflows and, among other items, an $11.75 million escrow deposit and $10 million of the Straight Path settlement payment classified in operating activities.
Outlook, significant events, and risks
- IDT expected to spin off Rafael Holdings (RHI) around March 26, 2018, distributing one RHI share for every two IDT shares of the corresponding class. Completion depended on a favorable tax opinion. Before the spin-off, IDT intended to transfer assets so RHI would have approximately $44 million in cash, cash equivalents, and marketable securities, plus $6 million in hedge-fund and other investments.
- The Board reduced the quarterly dividend from $0.19 to $0.09 per share, citing investment in growth initiatives and the RHI spin-off’s effect on the balance sheet. The $0.09 dividend was declared after quarter-end for payment in March 2018.
- The planned sale of IDT Financial Services Holding, a Gibraltar-based banking and e-money business, was expected to close in the second quarter of calendar 2018, subject to regulatory approval and other conditions. The stated purchase price was approximately $4.1 million plus net asset value; net asset value was $14.5 million at January 31. Completion was not assured.
- At January 31, accrued expenses included $39.7 million for regulatory fees under audit by the Universal Service Administrative Company. The filing also describes possible FCC penalties or liability relating to former Straight Path activities, a shareholder suit concerning Straight Path matters, and ongoing litigation with Tyco. The company said other proceedings were not expected to have a material adverse effect.
- Purchase commitments were $18.7 million, including a Central American telecom-services agreement; outstanding performance bonds totaled $15.1 million. Marketable securities and hedge-fund investments carried market risk. Management said there were no material changes to previously disclosed risk factors.
- No formal full-year earnings guidance was provided. Management noted that quarterly cash flow varies with operating results and the timing of receivables and payables.
Key investor verification points
- Track operating profitability and cash conversion, especially the widening gap between revenue growth and segment operating results.
- Assess whether cash resources remain adequate after the RHI asset transfers, given low reported working capital and cash-flow volatility.
- Verify completion and final economics of the RHI spin-off and IDT Financial Services sale, including tax and regulatory conditions.
- Monitor the regulatory-fee audit, Straight Path-related claims and FCC exposure, and the Tyco appeal process.
- Review the assumptions behind the $3.3 million tax benefit and the prior-year $16.6 million tax benefit when comparing earnings.
- Confirm the effects of the dividend reduction, planned $21–$23 million capital expenditures, and future investment needs on shareholder returns.