IDT

Business Context and Reporting Period

IDT Corporation is a multinational holding company with operations primarily in telecommunications and energy. The fiscal year ended July 31, 2011. The company operates through four reportable segments: Telecom Platform Services, Consumer Phone Services, IDT Energy, and Genie Oil & Gas. A significant corporate development during the period was the planned spin-off of its energy subsidiary, Genie Energy Ltd., expected to be executed in late October or early November 2011.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 11.5% to $1,555.5 million, driven primarily by a 13.1% increase in IDT Telecom revenues ($1,343.0 million) due to higher volume in Telecom Platform Services.
• Operating Income Decline: Despite revenue growth, income from operations decreased 32.0% to $21.9 million. This was largely due to a $10.8 million expense related to a patent infringement judgment (Alexsam) and increased selling, general, and administrative expenses.
• Segment Performance:
  • Telecom Platform Services: Revenues rose 14.5% to $1,316.6 million; operating income increased 50.0% to $21.6 million, aided by a $14.4 million gain on the termination of a Cablevision agreement.
  • IDT Energy: Revenues were flat at $203.6 million, but operating income dropped 40.6% to $22.5 million due to higher customer acquisition costs and tax audit accruals.
  • Consumer Phone Services: Revenues declined 28.9% to $26.4 million as the business continues in "harvest mode."
• Discontinued Operations: A $3.5 million gain was recorded from the reversal of a liability related to the IDT Entertainment contingent value arrangement.

Guidance, Outlook, and Risks

• Genie Spin-off: The company expects to spin off Genie Energy (IDT Energy and Genie Oil & Gas) to shareholders. Genie is expected to receive approximately $115 million in cash prior to the spin-off. Post-spin-off, IDT will lose the cash flows and revenues associated with the energy segment.
• Consumer Phone Exit: Management anticipates that Consumer Phone Services will no longer generate positive cash flow by calendar 2013, at which point the company intends to exit the business.
• Legal and Tax Contingencies:
  • Swedish VAT: A Swedish court upheld a VAT assessment of approximately $23.3 million (plus potential future exposure of $6.0 million). IDT has appealed and believes it will prevail; no accrual has been recorded.
  • Patent Litigation: A $10.1 million judgment was awarded against IDT by Alexsam regarding patent infringement. IDT intends to appeal.
  • Other Audits: Significant tax audits are ongoing in New York, New Jersey, and Florida, with potential additional assessments.
• Oil & Gas Development: Genie Oil & Gas continues R&D on oil shale projects in Colorado (AMSO) and Israel (IEI). The Israeli project faces a pending lawsuit from the Israel Union for Environmental Defense challenging its license.

Investor Verification Checklist

• Spin-off Timing and Tax Status: Verify the finalization of the Genie Energy spin-off and confirmation of its tax-free status under Section 355.
• Legal Outcomes: Monitor the appeal of the Swedish VAT judgment and the Alexsam patent infringement verdict, as adverse outcomes could materially impact cash flows.
• Telecom Margins: Assess the sustainability of Telecom Platform Services margins given the shift toward lower-margin products (IMTU, BOSS Revolution) and industry-wide pricing pressure.
• Energy Segment Liquidity: Review the capital requirements for the Genie Oil & Gas pilot tests (estimated $25-30 million) and the funding strategy post-spin-off.
• Consumer Phone Decline: Track the rate of customer churn and revenue decline in the Consumer Phone Services segment to validate the 2013 exit timeline.