IDT Corporation — Q2 FY2012 Form 10-Q
Reporting period: Three and six months ended January 31, 2012; fiscal year ends July 31. Unaudited results. IDT is a telecommunications-focused holding company; reported continuing operations exclude Genie Energy following its October 28, 2011 spin-off.
Financial performance and liquidity
| Metric | Three months ended Jan. 31, 2012 | Six months ended Jan. 31, 2012 |
|---|---|---|
| Revenue | $365.4 million, versus $340.9 million | $742.2 million, versus $650.6 million |
| Gross profit | $59.1 million, versus $58.1 million | $116.5 million, versus $115.5 million |
| Operating income (loss) | $4.0 million, versus $5.8 million | $(7.0) million, versus $10.2 million |
| Net income (loss) attributable to IDT | $2.7 million, versus $3.9 million | $(1.7) million, versus $19.6 million |
| Operating cash flow | Not separately provided for the quarter | $6.5 million, versus $30.2 million |
Consolidated gross margin was approximately 16.2% for the quarter and 15.7% for the six months, down from approximately 17.1% and 17.8%, respectively, in the comparable periods. Management attributed pressure to product mix, the loss of a high-margin cable telephony customer, and foreign currency effects. Six-month results included an $11.0 million loss on the T-Mobile litigation settlement; the prior-year comparison included a $5.4 million gain from an auction-rate securities arbitration settlement.
At January 31, cash and cash equivalents were $130.4 million, down from $220.4 million at July 31, 2011. Current assets were $263.0 million and current liabilities $281.8 million, a working-capital deficit of $18.8 million; liabilities included $77.9 million of deferred revenue that management said would not require cash settlement. Restricted cash totaled $19.0 million. Notes payable were $30.2 million, including current and long-term portions; the filing’s contractual-obligations table reports $47.5 million of notes payable including interest. Capital expenditures were $4.4 million for the six months.
Changes, outlook, and risks
- Genie spin-off: The October distribution removed Genie’s energy operations from continuing results. IDT committed $106.0 million of cash and restricted cash to fund Genie and provided the final $11.9 million after the spin-off. The spin-off and related cash deconsolidation were the primary drivers of the period’s cash decline.
- Segment trends: Telecom Platform Services revenue increased 7.8% in the quarter and 15.0% for the six months, led by retail communications, wholesale termination, and payment services. Wholesale minutes rose, but average revenue per minute fell. Hosted Platform Solutions revenue continued to decline. Consumer Phone Services revenue fell about 28% in both comparisons; management expects its customer base and revenue to keep declining.
- Management outlook: IDT expected operating cash flow and available cash and short-term investments to cover anticipated working capital and capital needs through January 31, 2013. Planned capital expenditures for that 12-month period were $10.0–$12.5 million. Management anticipated continuing quarterly dividends subject to financial results, resources, and strategic goals; a $0.15-per-share dividend was declared after quarter-end.
- Material contingencies: IDT paid $10 million to settle T-Mobile litigation and recorded an $11.0 million loss, but T-Mobile later sought enforcement of the binding term sheet and IDT opposed the motion. A Swedish VAT assessment, penalties, and interest totaled about $21.7 million, with potential additional exposure of $6.4 million; IDT appealed, recorded no accrual, and warned an adverse outcome could materially affect results and financial condition. IDT had accrued $10.0 million for the Alexsam patent matter and $12.6 million for Aerotel-related matters; additional Aerotel liability could not be estimated. A March 2012 partial summary judgment for Southwestern Bell on liability was disclosed after quarter-end; IDT estimated possible damages of $0–$12 million, with a damages trial scheduled for June 2012.
- Other risks and unusual items: IDT said future use of its 520 Broad Street property could result in a potentially material impairment; its carrying value was $43.9 million and mortgage balance $22.7 million. New risk disclosures addressed cyberattacks and network disruption, and compliance requirements for payment systems and financial services. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the T-Mobile settlement is finalized and how the enforcement motion is resolved.
- Developments and potential exposure in the Swedish VAT, Alexsam, Aerotel, and Southwestern Bell matters.
- Cash generation and liquidity after the Genie spin-off, including receipt of Fabrix’s $5.2 million payment in February 2012 and the expected $4.8 million Puerto Rico tax refund.
- Whether growth in Boss Revolution and payment services can offset continued declines in legacy calling cards, hosted services, and Consumer Phone Services, while sustaining margins.
- Potential impairment or disposition of the 520 Broad Street property and the status of pending spectrum-license sales; IDT reported a $6.8 million partial sale closing in March 2012.