IDT

IDT Corporation 10-Q Summary: Quarter Ended October 31, 2009

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for IDT Corporation for the three-month period ended October 31, 2009. IDT is a multinational holding company with operations primarily in telecommunications (IDT Telecom) and energy (Genie Energy). The company is classified as a "smaller reporting company." During the quarter, IDT completed the spin-off of CTM Media Holdings, Inc. (CTM) and reclassified several businesses, including IDT Carmel and Hillview Avenue Realty, as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 18.9% year-over-year. IDT Telecom revenues fell 14.9% due to competitive pricing pressures and a shift from calling cards to wireless services. IDT Energy revenues dropped 40.0% primarily due to lower average rates for electricity and natural gas.
• Improved Profitability: The company reported a net loss of $3.5 million, a significant improvement from the $37.3 million loss in the prior year. Operating income turned positive ($0.2 million) compared to a $12.1 million operating loss previously.
• Cost Reductions: Selling, general, and administrative (SG&A) expenses decreased 33.3% to $57.1 million, driven by a company-wide cost savings program and headcount reductions (approximately 1,580 employees terminated since Q3 2006).
• Discontinued Operations: The spin-off of CTM Media Holdings and the sale of Hillview Avenue Realty resulted in the reclassification of these assets and liabilities to discontinued operations. Proceeds from the Hillview sale were $4.4 million.
• Cash Flow: Operating cash flow improved significantly to a positive $2.2 million from a negative $52.4 million in the prior year, aided by working capital management and cost cuts.

Outlook, Risks, and Management Commentary

• Liquidity: Management expects existing cash, cash equivalents, and marketable securities to be sufficient to meet working capital and capital expenditure requirements for the next 12 months. However, this is contingent on collecting receivables and prevailing in legal actions.
• NYSE Compliance: The company is not in compliance with the NYSE's $100 million average market capitalization requirement. As of December 11, 2009, the 30-day average market cap was $83.9 million. IDT has until March 2010 to regain compliance or face delisting.
• Legal Proceedings: Significant litigation includes a complaint by Southwestern Bell regarding unpaid switched access charges (liability unestimable) and a breach of contract suit by T-Mobile seeking approximately $44 million. Additionally, the company faces ongoing tax audits, including a significant VAT assessment in Sweden (~$14.8 million) and accrued tax liabilities in New Jersey ($5.7 million).
• Alternative Energy: The company has a 50% interest in American Shale Oil, LLC (AMSO, LLC). IDT's estimated maximum exposure to additional loss for this venture is $7.8 million. The pilot test for shale oil production is projected for late 2010 or early 2011.
• Segment Performance: IDT Energy remains profitable with a 36.3% gross margin, though management notes these margins may not be sustainable. Telecom Platform Services continues to face margin compression due to aggressive competition.

Investor Verification Checklist

• Market Cap Compliance: Verify if IDT has met the NYSE $100 million market capitalization threshold by March 2010 to avoid delisting.
• Legal Liabilities: Monitor the status of the Southwestern Bell and T-Mobile lawsuits, as potential liabilities are currently unestimable but could be material.
• Tax Audits: Track the outcome of the Swedish VAT audit and New Jersey tax audits, as assessments could exceed current accruals.
• Telecom Margins: Assess whether the decline in average revenue per minute (ARPM) in the Telecom segment stabilizes or continues to erode profitability.
• AMSO Exposure: Review the progress of the shale oil pilot test and any potential requirement for additional capital contributions beyond the current $7.8 million exposure.