IDT Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended October 31, 2018; unaudited. Comparisons are with the three months ended October 31, 2017, unless otherwise noted. IDT operates Telecom & Payment Services and net2phone. Fiscal 2019 results reflect ASC 606; prior-year results were not restated and remain under ASC 605.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $362.3 million | $393.6 million |
| Income from operations | $1.3 million | $0.1 million |
| Net loss attributable to IDT | $1.4 million; $(0.06) per share | $2.1 million; $(0.08) per share |
| Cash provided by (used in) operating activities | $8.2 million | $(45.3) million |
| Capital expenditures | $4.5 million | $5.3 million |
- Revenue declined 7.9%. Direct costs fell faster, so approximate gross margin improved to 15.9% from 14.5%; operating margin was approximately 0.4% versus 0.02%.
- Telecom & Payment Services revenue fell 8.6% to $351.8 million, while segment operating income rose 19.1% to $5.3 million. net2phone revenue grew 34.4% to $10.5 million, but its operating loss widened to $1.5 million from $0.7 million.
- Within Telecom & Payment Services, Carrier Services revenue declined 15.8% and Boss Revolution Calling declined 6.6%; Mobile Top-Up grew 6.3%. Management cited lower traditional calling volumes and a shift toward higher-margin traffic as relevant trends.
- Cash and cash equivalents were $59.3 million and debt securities were $2.2 million at October 31. Management reported $61.8 million of cash, cash equivalents and marketable securities, a $38.2 million working-capital deficit, and $4.8 million of hedge-fund investments. The $59.3 million cash balance includes $15.0 million held by IDT Payment Services and considered unavailable for other purposes.
- Cash, cash equivalents and restricted cash totaled $195.5 million, including $130.7 million of restricted cash classified in assets held for sale. This total should not be treated as freely available liquidity.
- The balance sheet reports no outstanding revolving-loan balance. IDT Telecom entered into a secured credit facility of up to $25 million on October 31, 2018, maturing July 15, 2019; the filing does not clearly state whether any amount was drawn at period-end.
Material changes, outlook and risks
- Operating cash flow improved from cash use of $45.3 million to cash generation of $8.2 million. Cash decreased by $7.7 million during the quarter, including a $4.6 million unfavorable foreign-exchange effect. Financing included $3.9 million of Class B share repurchases; the quarterly dividend had been discontinued in fiscal 2018.
- ASC 606 adoption on August 1, 2018 produced an $8.6 million reduction in deferred revenue and a corresponding reduction in accumulated deficit, reflecting breakage revenue that would have been recognized in earlier periods under the new method. This was an opening-balance adjustment, not current-quarter revenue.
- IDT acquired Canadian SaaS/VoIP provider Versature for $5.9 million cash ($5.5 million net of cash acquired). Its results were not significant in the quarter. net2phone launched in Mexico and began beta deployment of a unified communications platform; management expected full deployment in calendar 2019 and anticipated it could support customer growth and higher average revenue per user.
- Management expected operating cash flow and available cash and securities to cover anticipated working capital and capital needs for the 12 months ending October 31, 2019. It forecast capital expenditures of $19–$22 million for that period. No specific revenue or earnings guidance was provided.
- The planned sale of IDT Financial Services Holding to JAR Fintech remained under discussion after JAR said the existing agreement had expired; parties were pursuing regulatory approvals and negotiating revised terms. Assets and liabilities remained classified as held for sale.
- Key exposures include ongoing market-wide pressure on traditional international calling, foreign-currency transaction losses ($1.2 million for the quarter), and legal and regulatory matters. A putative class action alleging Do Not Call violations remained active; the company said it could not estimate potential liability. An FCC-related fee audit was ongoing, with $42.3 million accrued for fees for audited and subsequent years. The company also disclosed $27.2 million of purchase commitments, including $25.2 million under a reciprocal services agreement, and $16.5 million of performance bonds.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting. The company reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the IDT Financial Services sale proceeds, timing and revised terms are ultimately agreed, and what regulatory approvals are required.
- How much of reported cash is restricted, held for sale, or otherwise unavailable, and whether the $25 million credit facility was drawn at October 31.
- Whether the improvement in operating cash flow is sustained, given management’s warning that quarterly cash flows fluctuate with operating results and working-capital timing.
- Trends in Carrier Services and Boss Revolution, the margins and growth of Mobile Top-Up, and whether net2phone growth can reduce its operating losses.
- Potential outcomes of the FCC fee audit and litigation, including the Do Not Call case and the Straight Path-related shareholder action; the filing does not provide clear estimates of potential liabilities.
- The effect of ASC 606 breakage estimates on revenue comparability and future results, alongside the different accounting basis used for the prior-year comparison.