IDT Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended January 31, 2013 (IDT fiscal Q2 and first half of fiscal 2013), compared with the corresponding 2012 periods. IDT is a multinational holding company whose principal business is telecommunications. Telecom Platform Services and Consumer Phone Services are its reportable segments; other businesses include Zedge, Fabrix, spectrum holdings, intellectual property and real estate. Genie Energy is reported as discontinued operations following its 2011 spin-off.
Key financial metrics
| Metric | Three months ended Jan. 31 | Six months ended Jan. 31 |
|---|---|---|
| Revenue | $411.7 million, up 12.7% from $365.4 million | $812.3 million, up 9.4% from $742.2 million |
| Gross profit | $67.2 million, up from $59.1 million | $132.5 million, up from $116.5 million |
| Consolidated gross margin | 16.3%, versus 16.2% | 16.3%, versus 15.7% |
| Operating income (loss) | $5.3 million, versus $4.0 million | $10.5 million, versus a $7.0 million loss |
| Income from continuing operations | $3.5 million, versus $2.9 million | $7.7 million, versus a $5.2 million loss |
| Net income attributable to IDT | $3.0 million, versus $2.7 million | $6.6 million, versus a $1.7 million loss |
| Diluted earnings per share | $0.13, versus $0.12 | $0.30, versus a $0.08 loss per share |
| Operating cash flow | Not presented separately for the quarter | $38.2 million, versus $6.5 million |
First-half 2012 results included $3.0 million of discontinued-operations income, including a $2.0 million settlement gain; its continuing-operations loss was $5.2 million. The current-period improvement in operating income also reflects comparison with an $11.0 million T-Mobile litigation settlement loss recorded in the first half of 2012.
At January 31, 2013, cash and cash equivalents were $150.6 million, down $0.9 million from July 31, 2012. Restricted cash was $34.8 million and should not be treated as generally available cash. Working capital was negative $24.2 million. Total notes payable were approximately $29.0 million, including $0.7 million current and $28.4 million long-term; total assets were $441.1 million and total equity was $97.0 million. The $25 million telecom credit facility had no amounts borrowed, and IDT reported covenant compliance.
First-half investing cash use was $20.3 million, including $7.5 million of capital expenditures and a $12.7 million increase in restricted cash. Financing cash use was $20.8 million, including $17.1 million of dividends. Cash from operations rose substantially, supported in part by working-capital movements, including receivables and customer deposits.
Material changes and operating trends
- Telecom Platform Services revenue increased 12.6% in Q2 and 9.4% in the first half. Total minutes of use rose 19.1% in both comparisons. Retail Communications grew 21.1% in Q2, led by Boss Revolution; Payment Services grew 27.9%, primarily on international mobile top-up offerings.
- Wholesale Termination Services revenue increased 4.8% in Q2, while average revenue per minute fell 14.5%; higher volumes offset lower pricing. Hosted Platform Solutions revenue declined 9.5%, and Consumer Phone Services revenue declined 25.3% as both businesses continued in harvest mode.
- First-half All Other revenue rose to $9.7 million from $5.2 million, including Fabrix revenue of $5.3 million versus $1.6 million. Fabrix’s first-half operating results improved to $0.2 million income from a $1.4 million loss, but its research and development costs remained significant.
- Other income was $2.7 million in the first half, versus a $0.2 million expense, including $2.0 million of foreign-currency transaction gains and $0.6 million of investment gains.
Outlook, risks, contingencies and unusual items
- Management said cash on hand and expected operating cash flow should cover anticipated working capital and capital expenditure needs for the 12 months ending January 31, 2014. It estimated capital expenditures of $11 million to $23 million for that period; no consolidated earnings or revenue guidance was provided.
- Management expected fiscal 2013 growth in Retail Communications and Payment Services, modest Wholesale Termination Services revenue growth, and continuing declines in Consumer Phone Services. It warned that migration from traditional calling cards to wireless and IP-based products pressures pricing and margins; newer Boss Revolution and IMTU offerings generally have lower gross margins than traditional cards.
- IDT suspended its regular $0.15-per-share quarterly dividend for the remainder of fiscal 2013 after paying a $0.60-per-share special dividend and a $0.15 regular dividend in the first half. The company was negotiating with the lender on its 520 Broad Street mortgage, with possible repayment in fiscal Q3 or Q4 if acceptable terms were reached. The note’s nominal principal was $21.7 million.
- Management said options for the 520 Broad Street property, carried at $42.6 million, could result in a material impairment loss. The company also reported an aggregate $15.1 million accrual for Southwestern Bell, Aerotel and Lycatel/Mox matters, with $7.9 million of reasonably possible liability above those accruals. Separately, the Alexsam matter had a $10.1 million accrual and $0–$4.1 million of reasonably possible additional liability; appeal and related proceedings remained pending.
- Other exposures include ongoing SEC and Department of Justice investigations related to allegations of improper foreign payments (the company said its own investigations found no evidence of such payments), tax audits, and $19.1 million of outstanding letters of credit and a surety bond. Tax authorities’ eventual assessments could exceed accrued amounts.
- The filing added risks concerning cyberattacks, network disruption, data security, payment-card standards, money-transmitter licensing and anti-money-laundering compliance. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether the 19.1% volume growth can persist while wholesale revenue per minute and traditional calling-card demand decline.
- How much of the $38.2 million first-half operating cash flow reflects sustainable earnings versus working-capital timing, and how restricted balances affect usable liquidity.
- Outcome and cash costs of the 520 Broad Street mortgage negotiations, property disposition or impairment decisions, and the listed legal proceedings.
- Progress against the $11–$23 million capital-expenditure estimate and the expected increase in customer deposits and corresponding restricted cash.
- Whether growth in Boss Revolution, IMTU and Fabrix can offset legacy-business declines while managing lower-margin sales, operating costs and regulatory requirements.
- Effect of the dividend suspension, the $1.2 million expense for the immediately vested ICTI equity grant to the CEO, and the continuing stock-based compensation burden.