IDT Corporation — FY2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended July 31, 2014. IDT is primarily a telecommunications and payments company; its principal operations are Telecom Platform Services, Consumer Phone Services, and Zedge. The filing also reports quarterly data, including the fiscal fourth quarter ended July 31, 2014. Amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $1,651.5 million | $1,620.6 million |
| Operating income | $29.8 million | $29.4 million |
| Operating margin | 1.8% | 1.8% |
| Income from continuing operations | $21.0 million | $18.1 million |
| Net income attributable to IDT | $18.8 million | $11.6 million |
| Diluted EPS from continuing operations | $0.82 | $0.72 |
| Cash provided by operating activities | $45.7 million | $57.2 million |
| Capital expenditures | $17.0 million | $14.5 million |
Direct costs were 82.8% of revenue, versus 83.7% in FY2013, implying a higher gross margin despite modest operating-margin growth. Operating cash flow less capital expenditures was approximately $28.7 million, down from $42.7 million.
Fiscal Q4 revenue was $420.7 million; operating income was $5.8 million; income from continuing operations was $8.4 million; and net income attributable to IDT was $7.7 million, or $0.33 diluted EPS.
At July 31, 2014, cash, cash equivalents and marketable securities totaled $166.7 million. Restricted cash was $68.5 million, and $12.9 million more was treated as substantially restricted. Working capital was negative $29.1 million (current ratio approximately 0.92). Debt comprised $13.0 million outstanding on the revolver and $6.6 million of notes; the revolver was repaid in August 2014. The filing says FY2015 anticipated cash needs were expected to be covered by operating cash flow and available balances.
Material changes and segment trends
- Telecom Platform Services: Revenue rose 1.7% to $1,615.6 million, while operating income fell 7.4% to $45.1 million. Retail Communications revenue grew 5.9% to $695.8 million, and Payment Services grew 4.6% to $202.5 million. Wholesale revenue declined 2.3% to $672.3 million, with minutes down 14.2%; Hosted Platform Solutions revenue fell 10.0% to $45.0 million.
- Consumer Phone Services: Revenue declined 24.1% to $11.0 million; operating income was $1.8 million. Management said the business remained in harvest mode and expected its customer base and revenue to keep declining.
- Zedge: Revenue increased 12.5% to $6.5 million, while operating income was approximately $0.3 million. App installs reached 111 million, with 49 million active installs.
- All Other: Revenue rose to $18.4 million and operating loss narrowed to $2.0 million, from $7.4 million. Fabrix, included in All Other, recorded $16.6 million revenue and a $0.7 million operating loss before its subsequent sale.
- Retail Communications’ growth was led by Boss Revolution, while traditional calling-card sales continued to decline. International money transfer launched on a limited basis in FY2014. European operations revenue increased 43.9% to $360 million; Asia-Pacific revenue declined to $61.3 million.
Outlook, risks, contingencies and unusual items
- Management forecast approximately $26.5 million of FY2015 capital expenditures, including renovation of the Newark headquarters, and expected to fund spending from operating cash flow and available resources. It expected to continue a regular quarterly dividend in light of cash generation, resources and business outlook; a $0.17-per-share FY2014 fourth-quarter dividend was paid October 3, 2014.
- On October 8, 2014, IDT completed the sale of its approximately 78% fully diluted interest in Fabrix to Ericsson. IDT expected net proceeds of approximately $73 million; $13 million of proceeds of the selling shareholders was placed in escrow for potential post-closing claims.
- Key business risks include intense telecom price competition, falling wholesale traffic volumes, dependence on distributors and carrier relationships, customer credit and collection exposure, cybersecurity and service disruptions, and extensive money-transmission, anti-money-laundering, privacy and telecom regulation.
- IDT accrued $42.7 million for disputed Universal Service Fund regulatory fees through FY2014; its review request remained pending. A German patent matter carried a $1.1 million accrual, with additional costs uncertain. In the Tyco dispute, the New York Court of Appeals ruled against IDT in June 2014; a reargument request was denied in September, and the company was evaluating its options.
- Unusual or potentially nonrecurring items included a $5.9 million foreign-currency transaction loss, a $0.6 million insurance gain, and a $4.1 million tax benefit from recognition of deferred tax assets at a U.K. subsidiary. FY2013 operating results included $9.3 million of net legal gains, affecting comparison.
- Management and the independent auditor reported effective internal control over financial reporting as of July 31, 2014; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether Boss Revolution and payment services can sustain growth and offset traditional calling-card declines, while protecting margins.
- The final cash proceeds from the Fabrix sale, escrow releases, and any post-closing adjustments or claims.
- The outcome and cash impact of the $42.7 million regulatory-fee accrual and other legal or tax contingencies.
- How much reported cash is practically available after customer deposits, restricted balances and payment-services regulatory requirements.
- FY2015 capital spending, operating cash generation, dividend sustainability, and the effect of continued declines in wholesale minutes and Consumer Phone Services.