IDT Corporation — Q2 FY2017 Form 10-Q
Reporting period: Three and six months ended January 31, 2017; fiscal year ends July 31. Comparisons are with the corresponding 2016 periods. Figures are in millions of dollars unless stated otherwise. Interim results are unaudited and not necessarily indicative of full-year results.
Business context
IDT is a multinational holding company focused mainly on telecommunications and payment services. Its reportable segments are Telecom Platform Services, Unified Communications as a Service (UCaaS), and Consumer Phone Services. Telecom Platform Services remains the dominant business. Zedge was spun off in June 2016; because the disposition did not qualify for discontinued-operations treatment, comparative results include it in the applicable prior-period figures. UCaaS became a separate reportable segment in FY2017, with prior segment results reclassified.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Revenue | $367.6 | $382.5 | $736.7 | $773.0 |
| Income from operations | $3.1 | $6.4 | $8.3 | $14.3 |
| Net income attributable to IDT | $0.9 | $4.1 | $22.8 | $8.3 |
| Basic / diluted EPS | $0.04 / $0.04 | $0.18 / $0.18 | $1.00 / $0.99 | $0.36 / $0.36 |
- Revenue declined 3.9% in Q2 and 4.7% for the six-month period. Operating income fell 50.9% and 41.9%, respectively.
- Gross margin, calculated as revenue less direct costs, was approximately 15.4% in Q2 versus 16.4% a year earlier, and 15.2% for six months versus 16.0%.
- Six-month net income includes a $16.6 million income-tax benefit from releasing the valuation allowance on deferred tax assets of a Netherlands subsidiary. The benefit materially boosted reported earnings; the filing does not provide a directly comparable adjusted net-income figure excluding it.
- Six-month operating cash flow was negative $0.8 million, versus positive $25.1 million in the prior year. Investing cash outflow was $21.0 million and financing cash outflow was $9.3 million; cash and cash equivalents decreased $32.0 million to $77.5 million.
- At January 31, cash, cash equivalents and marketable securities totaled $130.8 million. Restricted cash was $89.4 million, and $10.7 million of reported cash was held by payment/banking subsidiaries and unavailable for other purposes. Working capital was negative $6.0 million.
- No borrowings were outstanding under IDT Telecom’s $25 million revolving facility, which matures January 31, 2018. The subsidiary was in covenant compliance. The company reported no other funded debt balance in the provided filing text.
- Dividends paid during the first six months were $0.38 per share, or $8.8 million. A further $0.19 per-share dividend was declared in March 2017.
Material changes and segment trends
- Telecom Platform Services revenue fell 3.3% in Q2 and 4.1% for six months. Retail Communications revenue fell 8.2% and 8.3%, with lower calling volumes and continued weakness in U.S.-to-Mexico traffic and traditional calling cards. Wholesale Carrier Services revenue declined, while Payment Services grew 11.8% in Q2 and 9.5% for six months, led by airtime top-up and international money transfers.
- Telecom Platform Services’ direct costs declined less than revenue, raising direct costs as a share of segment revenue by 0.6 percentage points in Q2 and 1.0 point for six months. Management cited industry-wide rate pressure, including the U.S.-to-Mexico corridor, and competition from wireless providers and internet-based alternatives.
- UCaaS revenue grew 16.7% in Q2 and 8.5% for six months, but the segment remained loss-making at the operating level. Management expected continued investment in sales and IT staffing to support growth.
- Consumer Phone Services revenue continued to contract as the business is operated in “harvest mode”; management expects its customer base and revenue to keep declining.
- Selling, general and administrative expense decreased overall, reflecting lower costs in Telecom Platform Services and Consumer Phone Services, partly offset by higher UCaaS costs. Consolidated depreciation and amortization increased modestly, partly due to capitalized software development.
Outlook, risks and unusual items
- Management said operating cash flow and cash, cash equivalents and marketable securities on hand were expected to be sufficient for anticipated working-capital and capital-expenditure needs through January 31, 2018. Anticipated capital expenditures for that 12-month period were $19–$21 million.
- The company expected to make additional Cornerstone Pharmaceuticals investments in FY2017. Its controlled 50%-owned subsidiary held a $10 million, 3.5% convertible note due September 2018, with warrants also held by IDT and the subsidiary. On March 2, 2017, IDT sold 10% of its direct and indirect Cornerstone interests and rights to Chairman Howard Jonas for $1 million; the filing also discloses Cornerstone note holdings by Mr. Jonas, his spouse and their foundation.
- IDT incurred FCC-related legal fees of $0.9 million in Q2 and $1.1 million for six months concerning an inquiry into conduct at former subsidiary Straight Path Spectrum. Straight Path reached an FCC consent decree ending the related investigation against Straight Path; IDT said the FCC could still pursue separate action against IDT, and Straight Path could seek indemnification.
- IDT appealed dismissal of its lawsuit against Tyco concerning a disputed settlement agreement. The company said other ordinary-course legal proceedings were not expected to have a material adverse effect, while noting uncertainty.
- Other risks include ongoing telecom rate and volume pressure; market, currency and investment volatility; restricted customer-deposit cash; and potential recapture or reduction of New Jersey tax credits. The filing reported no material changes to previously disclosed risk factors.
- The company stated that it had no off-balance-sheet arrangements reasonably likely to materially affect financial condition, apart from disclosed spin-off indemnities and performance bonds of $13.8 million. Purchase commitments were $1.7 million.
Important facts for investors to verify
- How much of the six-month earnings increase is attributable to the $16.6 million tax benefit, and whether the deferred tax assets remain supportable.
- Whether operating cash flow recovers after the first-half outflow and whether the $19–$21 million capital-spending plan remains on track.
- Progress in stabilizing Telecom Platform Services margins and growing Payment Services and UCaaS, including the performance of the Boss Revolution apps and money-transfer offerings.
- Availability of liquidity after accounting for restricted and operationally unavailable cash, and compliance with the revolving-credit facility’s covenants and affiliate-loan limit.
- Any further developments in the FCC matter, the Tyco appeal, Cornerstone funding and the related-party transaction with the board chairman.