IDT Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended July 31, 2013. The filing also reports fourth-quarter results; figures are generally compared with FY2012. Amounts are U.S. dollars.
Business context
IDT is a multinational holding company focused primarily on telecommunications. Telecom Platform Services and Consumer Phone Services make up IDT Telecom; other reportable operations include mobile-content platform Zedge. All Other includes Fabrix, real estate and smaller businesses. Straight Path was spun off on July 31, 2013; its results, like Genie’s, are presented as discontinued operations for all periods.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $1,620.6 million | $1,506.3 million |
| Operating income (loss) | $29.4 million | $(7.1) million |
| Income from continuing operations | $18.1 million | $30.9 million |
| Net income attributable to IDT | $11.6 million | $38.6 million |
| Diluted EPS | $0.52 | $1.75 |
| Cash from operating activities | $59.3 million | $36.5 million |
| Capital expenditures | $14.5 million | $10.8 million |
- Revenue grew 7.6%. Direct costs were 83.7% of revenue versus 84.3%, implying gross margins of approximately 16.3% and 15.7%. Operating margin improved to 1.8% from negative 0.5%.
- Telecom Platform Services revenue rose 7.5% to $1,587.6 million; operating income increased to $48.5 million from $5.9 million. Retail Communications grew 19.0%, Payment Services 25.1%; Wholesale Termination Services declined 3.9%, and Hosted Platform Solutions declined 8.4%.
- Consumer Phone Services revenue fell 24.8% to $14.5 million and operating income fell to $1.8 million. Zedge revenue increased 53.2% to $5.8 million and it recorded $0.3 million operating income. All Other recorded a $7.3 million operating loss.
- Operating cash flow less capital expenditures was approximately $44.7 million. Cash and cash equivalents were $147.0 million and marketable securities $9.7 million. Restricted cash was $42.4 million and is not freely available. Working capital was negative $43.4 million.
- At year-end, the balance sheet showed $21.1 million drawn on a $25 million revolving facility and $7.2 million of notes payable. IDT Telecom repaid the revolver balance on August 30, 2013. Total assets were $435.4 million.
Changes, outlook and material items
- Continuing-operations income fell despite the operating turnaround: FY2012 included a $42.8 million income tax benefit, including a $36.9 million valuation-allowance release; FY2013 recorded a $15.9 million tax provision. FY2013 also included $9.3 million of net legal-related operating gains and a $4.4 million impairment charge on the 520 Broad Street property.
- Fourth-quarter FY2013 revenue was $412.1 million, operating income $1.4 million, continuing-operations loss $1.5 million and net loss attributable to IDT $3.7 million. The quarter included the $4.4 million building impairment.
- Management expected FY2014 capital expenditures of $16–18 million, funded from operating cash flow and available cash and securities. It expected Consumer Phone Services customers and revenue to keep declining and planned further investment in Telecom Platform Services growth initiatives, including salesforce expansion and new payment products.
- Management expected to resume regular quarterly dividends with a $0.15-per-share payment in December 2013, conditional on first-quarter results meeting expectations. A separate $0.08-per-share special dividend was paid in September 2013.
- Zedge strategic alternatives, including a possible spin-off or IPO, were under review. International money transfer began on a limited basis in FY2014; management expected licensing in nearly every U.S. state by year-end 2013.
Risks, contingencies and unusual items
- Telecom faces intense price competition, migration from traditional calling cards, shifting termination rates and reliance on carrier partners and distributors. Management noted Southern Asian rate changes reduced traffic volumes late in FY2013.
- Consumer financial services bring licensing, anti-money-laundering, privacy and consumer-protection obligations. The filing highlights potential costs and business impacts from regulation, including new remittance rules effective October 28, 2013.
- The company accrued $37.9 million for disputed Universal Service Fund regulatory fees; its challenge to the audit methodology remained unresolved. It also reported $11.8 million accrued for legal proceedings and $22.1 million of surety and performance bonds.
- Alexsam litigation had been remanded for damages recalculation; the parties agreed in September 2013 to settle a related matter. IDT paid Aerotel $5.4 million in July 2013, while Aerotel appealed the confirmed award. Other legal matters included a German patent-related dispute and ongoing Tyco litigation.
- The company recorded a $4.4 million impairment on its vacant Newark building, whose post-impairment carrying value was $37.7 million; management warned that future use or disposition could result in a further material loss.
- Other stated risks include cyberattacks and data-security exposure, receivable collection, market risk in investments, and the controlling voting power of CEO Howard Jonas.
Most important facts for investors to verify
- Whether improved Telecom Platform Services operating results persist without relying on legal gains, and whether retail and payment growth offsets wholesale pricing pressure and legacy declines.
- Cash availability after separating restricted balances, the effect of the working-capital deficit, and debt status following repayment of the revolver in August 2013.
- Resolution and cash impact of the $37.9 million regulatory-fee accrual, legal contingencies, and related surety bonds.
- Progress and economics of money transfer licensing and Zedge’s strategic review; confirm whether the expected dividend and FY2014 capital-spending plans were executed.
- Potential additional impairment or disposition loss on the Newark property and the outcome of the remaining litigation.