IDT Corporation — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended January 31, 2015; fiscal year ends July 31. Amounts are U.S. dollars. Financial statements are unaudited.
Business context
IDT is a multinational holding company focused primarily on telecommunications and payments. Telecom Platform Services and Consumer Phone Services make up IDT Telecom; Telecom Platform Services generated nearly all segment revenue. All Other includes Zedge, real estate and smaller businesses; Fabrix was included until its October 2014 sale.
Financial performance
| Metric | Three months ended Jan. 31, 2015 | Prior-year quarter | Six months ended Jan. 31, 2015 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $394.2 million | $406.4 million | $807.1 million | $827.1 million |
| Operating income | $3.7 million | $7.6 million | $83.3 million | $14.9 million |
| Net income attributable to IDT | $2.5 million | $2.5 million | $82.7 million | $6.1 million |
| Diluted EPS | $0.11 | $0.11 | $3.57 | $0.27 |
Quarterly revenue fell 3.0%; operating income declined about 51%, while attributable net income was nearly flat. Six-month earnings were substantially lifted by the $75.6 million Fabrix sale gain; excluding that gain, reported operating income was $7.7 million, versus $14.9 million a year earlier. Direct costs were $328.7 million for the quarter and $672.5 million for six months, implying approximate gross margins of 16.6% and 16.7%, respectively. Consolidated operating margins were approximately 0.9% for the quarter and 10.3% for six months, with the latter inflated by the Fabrix gain.
- Segment movements: For six months, Telecom Platform Services revenue decreased 2.2% to $792.8 million. Retail Communications grew 6.3% to $364.0 million, and Payment Services grew 2.2% to $101.1 million. Wholesale Termination Services fell 11.3% to $307.5 million despite higher minutes, reflecting lower-revenue traffic mix, reduced arbitrage opportunities and currency effects. Hosted Platform Solutions revenue fell 13.0% to $20.2 million. Consumer Phone Services revenue declined 22.4% to $4.6 million.
- Cash flow: Six-month operating cash flow was $21.0 million, investing cash flow was positive $15.7 million, and financing cash flow was negative $50.6 million. Cash decreased $20.7 million to $133.1 million; currency movements reduced cash by $6.8 million. Capital expenditures were $13.9 million.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $152.2 million; working capital was $2.7 million. Restricted cash was $69.2 million, and a further $15.5 million of cash held by payment and banking subsidiaries was considered unavailable for other purposes. No balance was drawn on the $25 million revolving facility; $6.5 million of notes payable was current. IDT Telecom was compliant with facility covenants.
- Capital returns: IDT paid $1.67 per share in dividends during the six months, including special dividends, totaling $38.9 million. A further $0.18-per-share dividend was declared in March 2015.
Material changes and unusual items
- In October 2014, IDT sold its approximately 78% interest in Fabrix. Its share of the adjusted sale proceeds was $68.0 million. By January 31, $36.0 million had been received and $32.0 million remained receivable; $13.0 million of proceeds was placed in escrow for potential post-closing claims. The six-month $75.6 million gain was recorded by a non-U.S. subsidiary and, the filing states, was not taxable in that subsidiary’s tax domicile and was not subject to U.S. tax until distributed; IDT had no plan to distribute the proceeds.
- Telecom Platform Services’ six-month operating income fell to $12.5 million from $24.3 million, reflecting weaker margins and revenue. Direct costs rose as a share of Telecom Platform Services revenue, in part due to lower-margin traffic mix and pricing pressure.
- IDT incurred $1.9 million of severance expense in the first six months and terminated about 20 employees. A separate February–March 2015 reduction of approximately 7% of global compensation costs is expected to lower the annual SG&A run rate by about $10 million, with approximately $6.6 million of severance expected in fiscal Q3.
Outlook, risks and contingencies
- Management expected operating cash flow and available cash, cash equivalents and marketable securities to cover anticipated working capital and capital needs for the 12 months ending January 31, 2016. Expected capital expenditures for that period were approximately $20.3 million.
- Management described continued pressure on traditional calling-card demand and pricing, competition in wholesale termination, and the need for new offerings. Boss Revolution retail communications and payment services were growth initiatives, but management cautioned that their growth and ability to offset declines were not assured. Consumer Phone Services’ customer base and revenue were expected to continue declining.
- Foreign-currency movements affect international revenues and expenses; international operations represented 30% of six-month revenue. IDT also held marketable securities and hedge-fund investments exposed to market volatility and possible loss.
- Commitments included $5.5 million of purchase commitments, $3.3 million of standby letters of credit and $11.0 million of performance bonds. Refundable customer deposits were $64.6 million. IDT had an estimated $1.7 million liability to Straight Path for pre-spin-off obligations.
- In the Tyco dispute, the New York Court of Appeals reversed a ruling favorable to IDT and reinstated dismissal of IDT’s complaint; a rehearing motion was denied in September 2014. IDT said it was evaluating its options. Management did not expect other ordinary-course legal matters to materially affect results, cash flows or financial condition. No material risk-factor changes were reported.
- Management planned to adopt the new revenue recognition standard on August 1, 2017 and was evaluating its impact. Disclosure controls were reported effective as of January 31, 2015, with no material change in internal control reported for the quarter.
Investor verification points
- Verify the Fabrix proceeds collection, receivable balance, escrow terms and tax treatment; assess how much of six-month earnings is nonrecurring.
- Track Telecom Platform Services’ revenue and margins, especially wholesale pricing and traffic mix, and whether Boss Revolution and Payment Services growth persists.
- Assess liquidity available for general use against restricted balances, customer deposits, planned capital spending, dividends and other commitments.
- Monitor the realized costs and savings from the workforce reduction, including the expected $6.6 million severance charge and $10 million annual SG&A savings.
- Review the status and potential exposure of the Tyco matter, post-sale Fabrix claims and Straight Path obligations.