IDT Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended October 31, 2014, the first quarter of IDT’s fiscal 2015; comparisons are with the three months ended October 31, 2013. IDT operates primarily in telecommunications and payments, with reportable segments Telecom Platform Services, Consumer Phone Services and Zedge. Fabrix was sold in October 2014.
Financial results and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $412.9 million | $420.7 million |
| Income from operations | $79.6 million | $7.3 million |
| Net income attributable to IDT | $80.2 million | $3.5 million |
| Basic / diluted earnings per share | $3.52 / $3.47 | $0.17 / $0.15 |
| Cash provided by operations | $8.3 million | $11.0 million |
- Operating income includes a $75.1 million gain on the Fabrix sale; excluding that gain, operating income was approximately $4.5 million. The prior-year quarter included $0.9 million of other operating gains.
- Direct costs were $343.8 million, implying gross profit of approximately $69.1 million and gross margin of 16.7%, versus approximately 16.7% in the prior-year quarter. Reported operating margin was 19.3%, substantially affected by the Fabrix gain.
- Cash and cash equivalents were $168.2 million, marketable securities $15.1 million, and short-term restricted cash $60.6 million at October 31. Management reported $228.8 million of cash, cash equivalents and marketable securities and $16.7 million of working capital. Some cash held by payment and banking subsidiaries was unavailable for general use.
- Investing activities provided $27.5 million, including $36.0 million of net Fabrix sale proceeds; financing activities used $18.3 million. Cash increased $14.4 million to $168.2 million.
- No revolving credit borrowing was outstanding at quarter-end; the subsidiary’s facility allows borrowing up to $25 million and matures January 2016. Notes payable were $6.6 million current and none long-term. IDT reported compliance with credit covenants.
Material changes and segment trends
- Total revenue declined 1.9%. Telecom Platform Services revenue fell 2.2% to $403.8 million; Consumer Phone Services fell 23.4% to $2.3 million. Zedge revenue rose 40.9% to $2.0 million.
- Within Telecom Platform Services, Retail Communications grew 5.9% to $182.6 million, supported by Boss Revolution; Payment Services rose 2.1% to $51.2 million. Wholesale Termination Services declined 10.6% to $159.7 million, chiefly because of lower revenue per minute and traffic mix. Hosted Platform Solutions fell 11.2% to $10.3 million.
- Telecom Platform Services operating income dropped 52.4% to $5.7 million, reflecting weaker wholesale economics and higher selling, general and administrative costs. IDT Telecom’s direct costs as a share of revenue increased to 84.4% from 84.1%.
- Consumer Phone Services remains in harvest mode; the company expects its customer base and revenue to keep declining. Zedge operating income was $0.3 million, up from $0.2 million.
- Fabrix’s sale generated $75.1 million of accounting gain. IDT owned approximately 78%; its share of the stated sale price was $67.5 million. At quarter-end, $36.0 million had been received and $31.5 million remained receivable; $13.0 million of sale proceeds was placed in escrow with staged release subject to claims.
Outlook, commentary and risks
- Management expected operating cash generation and available resources to cover anticipated working capital and capital needs for the twelve months ending October 31, 2015. Expected capital expenditures for that period were approximately $23.1 million, including building renovations.
- Management described ongoing pressure on traditional calling-card demand and pricing from wireless and internet-based alternatives, and competition in wholesale termination. Boss Revolution, airtime top-up and payment offerings are intended to offset legacy declines, but future growth is not assured. The company expected to introduce messaging in its Boss Revolution app in the first half of calendar 2015.
- In October, the board declared a special dividend of $0.68 per share, paid November 21, 2014; a further $0.18-per-share dividend was declared in December. The quarter’s declared dividend was $0.85 per share, including the special dividend.
- IDT recorded $1.5 million in severance expense after reducing approximately 20 sales and administrative positions; $1.4 million remained accrued at quarter-end.
- Legal and other exposures include a €1.5 million ($1.9 million) security deposit still held in the Mox patent matter and an uncertain related cost outcome; $3.3 million estimated liability to Straight Path for pre-spin-off matters; $10.3 million in performance bonds; and $3.7 million in letters of credit. The company also disclosed ongoing Tyco litigation and other ordinary-course proceedings.
- Foreign currency and investment-value fluctuations are identified risks. The company said there were no material changes to previously disclosed risk factors. It planned to adopt the new revenue recognition standard on August 1, 2017 and was evaluating its effect.
Most important facts for investors to verify
- Whether the Fabrix receivables are collected and escrow funds released, and whether any post-closing claims arise.
- Underlying operating performance excluding the one-time Fabrix gain, especially the margin and revenue trends in wholesale and retail telecom.
- Availability of reported liquidity after accounting for restricted or subsidiary-held cash, dividends and planned capital expenditures.
- Developments in the Mox deposit, Tyco matter and Straight Path-related obligations.
- Whether Boss Revolution and payment-service growth can offset declines in legacy calling products and Consumer Phone Services.