IDT

IDT Corporation 10-Q Summary: Quarter Ended October 31, 2008

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for IDT Corporation, a multinational holding company with principal businesses in telecommunications (IDT Telecom), energy services (IDT Energy), debt collection (IDT Carmel), and various other ventures (IDT Capital). The reporting period covers the three months ended October 31, 2008 (First Quarter of Fiscal 2009). The company is currently facing significant liquidity challenges, regulatory scrutiny regarding NYSE listing compliance, and ongoing tax audits.

Key Financial Metrics

Note: Q1 2008 results included a $40.0 million non-recurring arbitration award income which significantly boosted prior year operating income.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 5.7% year-over-year, driven primarily by a 12.3% drop in IDT Telecom revenues due to competitive pricing pressures, declining calling card volumes, and foreign currency impacts. IDT Energy revenues increased 59.6% due to higher customer base and utility rates.
• Profitability Reversal: The company swung from a net income of $6.8 million in Q1 2008 to a net loss of $37.3 million in Q1 2009. This is largely attributable to the absence of the $40.0 million arbitration award recorded in the prior year and a $6.3 million charge for an "other than temporary decline" in the value of auction rate securities.
• Investment Losses: "Other (expense) income, net" turned negative at $(21.2) million compared to $6.3 million in the prior year, reflecting realized losses on marketable securities and declines in hedge fund investments.
• Cost Reductions: Selling, general, and administrative expenses decreased 17.4% due to cost-saving initiatives and reduced headcount, partially offset by increased R&D spending in alternative energy.

Guidance, Outlook, and Risks

• NYSE Compliance Risk: The company received notices from the NYSE regarding non-compliance with market capitalization and minimum stock price requirements. A compliance plan is under review; failure to regain compliance by April 2009 (price) and March 2010 (market cap) could result in delisting.
• Liquidity and Tax Obligations: The company has an accumulated deficit of $133.7 million. It owes approximately $67 million to the IRS (including interest) from prior audits, with a payment plan in place to settle the balance by mid-June 2009. Management believes current cash and marketable securities are sufficient for the next 12 months but may need to raise additional capital.
• Asset Monetization: The company has retained Jefferies & Company to assist in monetizing non-core assets. In December 2008, it announced an agreement to sell its European prepaid payment services business for approximately $15 million.
• Internal Controls: The company disclosed a material weakness in internal controls regarding goodwill impairment testing that remains unremediated as of October 31, 2008.
• Legal Proceedings: Significant ongoing litigation includes disputes with Aerotel (patent settlement), Tyco (wavelength rights), and eBay/Skype (patent infringement). Additionally, the company faces tax audits in Europe regarding VAT.

Investor Verification Checklist

• NYSE Delisting Status: Verify the outcome of the NYSE compliance plan review expected in early January 2009.
• IRS Payment Plan Adherence: Monitor the company's ability to meet the $55 million payment due to the IRS by mid-February 2009 and the remaining balance by mid-June 2009.
• Auction Rate Securities Valuation: Assess the remaining exposure to Fannie Mae/Freddie Mac auction rate securities, which have already suffered significant write-downs.
• European VAT Seizure: Track the status of the Swedish Tax Agency's asset seizure application against subsidiary Inter Direct Tel Ltd.
• Telecom Segment Margins: Evaluate the sustainability of IDT Telecom margins given the aggressive competitive pricing and migration of customers to wireless services.