IDT Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended July 31, 2017; this is an annual filing, not a standalone Q4 filing. Q4 figures are noted separately below. IDT is a multinational holding company, with telecommunications and payment services generating almost all revenue.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $1,501.7 million | $1,496.3 million |
| Income from operations | $5.5 million | $26.2 million |
| Net income | $9.6 million | $25.4 million |
| Net income attributable to IDT | $8.2 million | $23.5 million |
| Diluted EPS | $0.35 | $1.03 |
| Cash flow from operations | $19.0 million | $49.1 million |
| Cash, cash equivalents and marketable securities | $148.6 million | Not stated here |
| Working capital | $8.3 million | Not stated here |
| Borrowings outstanding | None | None |
Direct costs were $1,275.7 million, implying gross profit of approximately $226.0 million and a gross margin of about 15.0%, versus approximately 16.7% in FY2016. Operating margin was about 0.4%, versus 1.8%. IDT had an undrawn $25 million revolving credit facility maturing April 30, 2018. Cash-flow totals were $19.0 million from operations, $(39.6) million from investing and $6.8 million from financing; cash and cash equivalents decreased $13.5 million.
FY2017 Q4: Revenue was $395.0 million, operating income $3.7 million, net loss $(9.5) million, and loss attributable to IDT $(9.8) million, or $(0.41) per diluted share. The quarter included an $11.1 million income-tax expense from an increased valuation allowance.
Segments and changes versus FY2016
- Telecom Platform Services: Revenue rose 0.9% to $1,464.1 million, but operating income fell to $24.4 million from $32.8 million. Retail Communications revenue declined 8.2% to $610.2 million, reflecting lower calling volumes, competitive pressure and weakness in the U.S.–Mexico corridor. Wholesale Carrier Services revenue increased 7.3% to $608.6 million; Payment Services grew 11.8% to $245.3 million.
- Unified Communications as a Service: Revenue increased 11.8% to $29.4 million, while operating loss widened to $1.9 million from $1.6 million. Growth included hosted PBX, SIP trunking and cable telephony.
- Consumer Phone Services: Revenue declined 20.2% to $5.5 million; operating income was $1.1 million. The business remains in harvest mode and management expects further customer and revenue declines.
- All Other: Revenue declined to $2.7 million from $11.5 million, principally because Zedge was spun off in June 2016. All Other operating income was $0.3 million versus $4.2 million.
Outlook, material items and risks
- Management expected operating cash flow and July 31 liquidity to cover anticipated FY2018 working capital and capital needs. FY2018 capital expenditures were estimated at $21–$23 million.
- IDT planned to spin off Rafael Holdings, including real estate and interests in Rafael Pharmaceuticals and Lipomedix, and intended to contribute $50–$60 million in cash before the spin-off. The company said post-separation liquidity should support its business for the medium term, while noting uncertainty about future financing needs.
- The planned sale of the Gibraltar-based bank was expected to close in calendar 2017, subject to regulatory approval and other conditions. The agreement provided for approximately $3.8 million plus the bank’s net assets, estimated at about $14 million at July 31, 2017.
- FY2017 included a $10.0 million liability, plus legal fees, related to a settlement and mutual release with Straight Path; the arrangement also involved transfer of Straight Path IP Group for $6 million and potential sharing of future patent proceeds. A putative class and derivative lawsuit challenging related transactions was pending; IDT moved to dismiss and intended to defend itself.
- Accrued Universal Service Fund-related regulatory fees were $43.5 million at year-end, with disputes and audits unresolved. Carrier payable disputes totaled $26.1 million. Five largest wholesale customers represented 34.9% of gross receivables, increasing collection exposure.
- Competition, declining telecom prices and substitution by mobile and internet calling services threaten revenue and margins. Payment businesses also face licensing, anti-money-laundering, consumer-protection and data-security requirements. Management disclosed past attempted and successful cyberattacks but said it did not believe material internal or customer information had been compromised.
- Other unusual items included a $16.6 million deferred-tax benefit from recognizing certain Netherlands tax assets, partly offset by an $11.1 million U.S. valuation allowance; the overall FY2017 income-tax line was a $2.0 million benefit. IDT reported no goodwill impairment.
Most important facts for investors to verify
- Execution, timing and final funding terms of the Rafael Holdings spin-off, especially the planned $50–$60 million cash contribution and resulting IDT liquidity.
- Underlying recurring profitability and cash generation after the Straight Path settlement and deferred-tax effects; operating cash flow fell to $19.0 million.
- Retail Communications volume and margin trends, and whether growth in wholesale, payment services and UCaaS can offset continued legacy calling declines.
- Collection performance on the increased wholesale receivables and resolution of the $43.5 million USF accrual and carrier disputes.
- Closing and proceeds of the Gibraltar bank sale, status of the Straight Path-related litigation and FCC exposure, and any material developments in regulatory or cybersecurity risks.
- Liquidity available for general operations: $10.8 million held by IDT Payment Services was unavailable for other purposes, and much of the cash associated with the bank was restricted or held for sale.