IDT Corporation — Fiscal 2014 First Quarter
The unaudited quarter ended October 31, 2013; comparisons are with the quarter ended October 31, 2012. IDT is a multinational holding company whose business is dominated by telecommunications. Straight Path was spun off on July 31, 2013 and is presented as discontinued operations.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $420.7 million | $400.1 million |
| Income from operations | $7.3 million | $6.7 million |
| Income from continuing operations | $4.1 million | $5.6 million |
| Net income attributable to IDT | $3.5 million | $3.6 million |
| Diluted earnings per share | $0.15 | $0.16 |
| Operating cash flow | $15.6 million | $20.5 million |
| Capital expenditures | $3.6 million | $3.6 million |
Gross profit, calculated as revenue less direct cost of revenues, was approximately $70.4 million, or 16.7% of revenue, versus $64.9 million, or 16.2%, a year earlier. Operating margin was approximately 1.7%, versus 1.7%. Net income attributable to IDT was approximately 0.8% of revenue, versus 0.9%.
At October 31, 2013, cash and cash equivalents were $150.8 million and marketable securities were $11.0 million. Restricted cash totaled $43.0 million. Working capital was negative $38.4 million. The revolving credit balance was $15.0 million; notes payable totaled approximately $7.1 million, including current and long-term portions. IDT Telecom’s $25 million credit facility matures July 11, 2014. The quarter-end balance was repaid on November 12, 2013.
Changes and operating drivers
- Revenue rose 5.1%, while operating income increased 9.0%; IDT-attributable net income declined 2.5% and diluted EPS declined from $0.16 to $0.15.
- Telecom Platform Services revenue grew 5.3% to $412.7 million. Retail Communications rose 12.3%, led by Boss Revolution; Payment Services rose 14.2%, primarily due to international airtime top-up. Wholesale Termination revenue fell 1.7%, and Hosted Platform Solutions fell 9.7%.
- Telecom Platform Services minutes of use fell 16.2%, including a 23.6% decline in wholesale minutes. Management said changing termination rates and lower web-based prepaid traffic contributed to the decline.
- Consumer Phone Services revenue fell 24.9%; management expects its customer base and revenue to keep declining as the business remains in harvest mode.
- Zedge revenue grew 24.6% to $1.4 million and returned to operating income of $0.2 million. All Other reported an operating loss of $0.6 million, including Fabrix’s operating loss of $0.7 million.
- Operating cash flow decreased to $15.6 million from $20.5 million. Cash increased by $3.9 million during the quarter, compared with $14.6 million a year earlier.
Outlook, risks and unusual items
- Management expects cash from operations and cash, cash equivalents and marketable securities on hand to cover anticipated working capital and capital needs for the 12 months ending October 31, 2014. Expected capital expenditures for that period are $16 million to $18 million. No earnings or revenue guidance was provided.
- Management plans continued investment in Boss Revolution distribution, marketing and payment products, including international money transfer; it cautioned that growth depends on customer adoption and new or expanded partnerships. Wireless and IP-based alternatives continue to pressure traditional calling products and pricing.
- The company recorded a $1.2 million foreign-currency transaction loss, partly offset by a $0.7 million gain on investments. A $0.6 million insurance recovery for prior-period building damage was recorded as an operating gain.
- The Straight Path spin-off entails continuing separation, tax and reimbursement obligations. IDT’s estimated liability for pre-spin-off Straight Path liabilities was $2.5 million at quarter-end; the filing states that the spin-off is intended to qualify as tax-free and describes a legal opinion, not a tax ruling.
- IDT accrued $7.8 million in aggregate for the Alexsam and Lycatel/Mox matters. The Alexsam settlement was reached in October and paid November 4, 2013; the settlement amount is confidential. Aerotel’s approximately $5.4 million arbitration award was paid in July, and Aerotel appealed the court’s confirmation.
- The 520 Broad Street property had a carrying value of $37.4 million. Management was considering future use or disposition options that could result in a further, potentially material, impairment loss.
- Liquidity includes significant restricted cash, in part associated with IDT Financial Services customer deposits; those funds are not equivalent to unrestricted cash. The filing also reports $4.0 million of letters of credit and $9.5 million of performance bonds.
Most important facts to verify
- Whether Boss Revolution and Payment Services growth can offset declines in traditional calling, wholesale volumes and Consumer Phone Services.
- Cash conversion and working-capital needs, particularly as restricted cash and customer deposits change; confirm availability under the credit facility and its July 2014 maturity.
- The eventual amounts and outcomes of the Alexsam settlement, Lycatel/Mox security-deposit dispute and Aerotel appeal, against the $7.8 million accrued balance where applicable.
- Whether the Straight Path spin-off receives the intended tax treatment and whether related indemnity liabilities exceed current estimates.
- Management’s decision on 520 Broad Street and the potential for a further impairment.