IDT Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended October 31, 2019; compared with the three months ended October 31, 2018. Amounts are in U.S. dollars unless noted.
Business context
IDT operates two reportable segments: Telecom & Payment Services, including retail telecom, payments and wholesale calling services; and net2phone, which provides cloud communications and telephony services to businesses. Telecom & Payment Services generated 96.3% of quarterly revenue.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $340.2 million | $362.3 million | Down 6.1% |
| Direct costs of revenue | $279.5 million | $304.7 million | Down 8.3% |
| Gross margin, calculated | 17.9% | 15.9% | Up about 2.0 percentage points |
| Operating income (loss) | $(1.4) million | $0.2 million | Declined $1.6 million |
| Net loss attributable to IDT | $(1.5) million | $(2.3) million | Loss narrowed $0.8 million |
| Loss per share, basic and diluted | $(0.06) | $(0.10) | Improved |
| Operating cash flow | $(5.0) million | $8.2 million | Declined $13.2 million |
| Capital expenditures | $3.9 million | $4.5 million | Down $0.6 million |
Telecom & Payment Services revenue fell 6.9% to $327.6 million, while segment operating income rose to $4.4 million from $4.2 million. net2phone revenue increased 20.6% to $12.6 million, but its operating loss widened to $3.3 million from $1.5 million. Corporate operating costs were approximately $2.5 million, broadly unchanged.
At October 31, cash and cash equivalents were $62.2 million and restricted cash was $190.2 million; cash, cash equivalents, debt securities and current equity investments totaled $77.8 million. Current assets were $373.7 million and current liabilities $396.4 million, a $22.7 million working-capital deficit. Total liabilities were $406.7 million and equity was $52.3 million. The filing does not report a funded debt balance. A $25 million revolving credit facility was entered into on October 31; the amount drawn, if any, is not specified in the filing text.
Material changes and management commentary
- Revenue pressure was concentrated in Carrier Services, down 20.2% to $113.5 million, and BOSS Revolution Calling, down 5.9% to $116.2 million. Management cited continued industry migration away from traditional international calling, including unlimited wireless plans and over-the-top services.
- Mobile Top-Up revenue grew 17.6% to $76.8 million, attributed to bundled offerings and new mobile partners. Growth initiatives revenue rose 63.1% to $9.8 million; BOSS Revolution Money Transfer grew 56% and National Retail Solutions grew 93%.
- net2phone-UCaaS revenue grew 50.3% to $7.2 million, supported by channel expansion, South American growth and the Versature acquisition. Platform Services revenue declined 4.5% to $5.4 million.
- Telecom & Payment Services direct costs declined faster than revenue, improving segment cost ratio by 130 basis points, mainly from higher-margin Carrier Services traffic and customer migration to direct-to-consumer channels. net2phone’s direct-cost ratio improved by 530 basis points, but higher selling, general and administrative costs contributed to its larger operating loss.
- Other income was $0.2 million versus expense of $1.3 million a year earlier, mainly reflecting a $0.7 million foreign-currency gain compared with a $1.2 million loss in the prior period. The quarter included $0.6 million of severance and $2.8 million of other operating expenses, including a $2.2 million foreign non-income-tax accrual, a $0.4 million net2phone indemnification claim and corporate legal costs net of insurance proceeds.
Liquidity, outlook and risks
- Management expected operating cash flow and cash, cash equivalents, debt securities and current equity investments on hand to be sufficient for anticipated working capital and capital expenditures for the twelve months ending October 31, 2020. Planned capital expenditures for that period were $20 million to $22 million.
- Cash, cash equivalents and restricted cash totaled $252.4 million at quarter-end, down $4.8 million from July 31. Restricted cash includes funds held by IDT’s Gibraltar-based bank; management also treated $9.8 million held by IDT Payment Services as unavailable for general use. Operating cash flow was negative, while foreign-exchange movements increased reported cash and restricted cash by $11.4 million.
- The $25 million TD Bank revolving facility is secured primarily by IDT Telecom assets, matures July 15, 2020, and carries financial covenants and other restrictions. Its availability and any borrowing should be distinguished from cash on hand.
- Commitments included $30.7 million of purchase commitments, including $26.5 million under telecom-services commitments, and $17.5 million of outstanding performance bonds. An FCC-related regulatory-fee audit was ongoing; accrued regulatory fees were $42.1 million at quarter-end.
- Contingencies include class-action and other legal matters, potential sales/use-tax exposure following the Wayfair decision, and a possible FCC action related to former subsidiary Straight Path Spectrum. Management said it could not estimate potential liability for certain claims. The company also recorded an $8.0 million fiscal-2019 accrual for foreign non-income taxes and corrected prior quarterly statements; management deemed those prior-period adjustments not material.
- Disclosure controls were deemed ineffective because of a material weakness in management review controls for non-income taxes at a foreign entity. Management described planned remediation measures and said additional procedures supported fair presentation of the current-quarter financial statements. The filing reported no material changes to the previously disclosed risk factors.
- Management noted that international prepaid calling is typically seasonal, with higher minutes in the second and fourth fiscal quarters. No specific full-year revenue or earnings guidance was provided.
Investor verification priorities
- Track whether Carrier Services and BOSS Revolution Calling declines continue, and whether Mobile Top-Up and growth businesses can offset them.
- Monitor net2phone’s revenue growth against its operating losses and rising selling and marketing costs.
- Reconcile liquidity using unrestricted versus restricted cash, the working-capital deficit, operating cash flow and any borrowings under the new credit line.
- Follow the FCC regulatory-fee audit and the $42.1 million accrual, as well as sales-tax, legal and Straight Path-related contingencies.
- Assess progress in remediating the material weakness in tax-related internal controls and confirm any subsequent disclosure on its effectiveness.