IDT CORP quarterly report, Q1 FY2023

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IDT Corporation — Fiscal Q1 2023 Form 10-Q

Reporting period: Three months ended October 31, 2022, compared with the three months ended October 31, 2021. The interim financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are in millions unless noted.

Financial performance and liquidity

  • Revenue: $321.8, down 13.0% from $370.1. Traditional Communications revenue fell 20.2% to $265.7; growth in Fintech, NRS and net2phone partly offset the decline.
  • Profitability: Gross profit, calculated as revenue less direct costs, was $90.2 versus $78.5; gross margin was approximately 28.0% versus 21.2%. Operating income rose to $20.2 from $13.8, and operating margin was approximately 6.3% versus 3.7%. Net income attributable to IDT was $11.0, or $0.43 per diluted share, compared with a $2.5 attributable loss, or $0.10 per share, a year earlier.
  • Other results: Other expense was $3.8 versus $16.2, primarily reflecting lower investment losses ($1.9 versus $14.5). Income tax expense was $4.3, compared with an $0.1 tax benefit in the prior-year quarter.
  • Cash flow: Operating cash flow was $18.2 versus cash used of $5.9. Investing activities provided $4.2, compared with $7.8 used; financing activities used $7.1, compared with $10.9 provided. Cash, cash equivalents and restricted cash increased $9.2 to $198.8, including $90.9 of restricted cash.
  • Liquidity and obligations: Current assets were $361.1 and current liabilities $292.8, implying working capital of $68.3 and a current ratio of approximately 1.23. Management said available resources and expected operating cash flow should meet anticipated working capital and capital expenditure needs through October 31, 2023. The company reported $137.1 of cash, cash equivalents, debt securities and current equity investments; $25.9 of cash held by money-transfer subsidiaries was unavailable for other purposes. No borrowings were outstanding on the $25.0 revolving credit facility. Lease liabilities totaled $7.0.
  • Capital spending and shareholder returns: Quarterly capital expenditures were $5.2; management estimated $19–$21 for the 12 months ending October 31, 2023. IDT repurchased 203,436 Class B shares for $5.0 under its program, with 5.0 million shares remaining authorized for repurchase.

Material changes and segment trends

  • Fintech: Revenue increased 39.8% to $19.9, led by BOSS Money growth of 45.1%. Segment operating income was $1.5 versus a $1.6 loss; results included a $1.6 gain from writing off contingent consideration related to the Leaf acquisition.
  • National Retail Solutions (NRS): Revenue increased 91.7% to $19.3 and operating income rose to $5.2 from $1.3. Active POS terminals increased 37% to 20,700 and payment processing accounts increased 66% to 11,300.
  • net2phone: Revenue grew 31.3% to $17.0; subscription revenue rose 32.6%. Seats served increased 26% to 309,000. The operating loss narrowed to $1.1 from $4.2.
  • Traditional Communications: Revenue declined 20.2% to $265.7 and operating income fell 15.1% to $17.3. Mobile Top-Up revenue fell 15.1%, BOSS Revolution Calling fell 18.6%, and IDT Global fell 30.9%. Management cited a deteriorating Mobile Top-Up corridor and continuing declines in international calling and voice minutes.
  • The company revised its reportable segments effective August 1, 2022, separating NRS from Fintech and moving certain businesses from Traditional Communications to Fintech; prior-period segment data was restated.

Outlook, risks and unusual items

  • Management expects cash from operations and available cash and investments to cover anticipated working capital and capital spending for the following 12 months. It cautioned that cash flows vary significantly between periods. No earnings or revenue guidance was provided.
  • Traditional voice businesses face ongoing substitution by unlimited wireless calling and internet-based calling, messaging and video services. Management expects IDT Global revenue and minutes to continue declining, while prioritizing economics over volume.
  • The company is considering spin-offs and other dispositions, and may pursue acquisitions and strategic investments; no transaction is assured. A spin-off could reduce available capital resources.
  • The Straight Path stockholder class action remained in trial, and the company said it could not estimate potential liability. It recorded $2.5 of related legal fees, partly offset by $1.7 of insurance recoveries during the quarter.
  • A USAC audit of the company’s 2016 revenue filings remained unresolved. The company had been invoiced $4.7 for telecommunications regulatory funds and was appealing the findings; accrued FCC-related regulatory fees totaled $31.9 at October 31, 2022.
  • Potential sales and use tax exposure following the Wayfair decision could materially affect results if claims succeed. A separate Sprint patent claim had been dismissed without prejudice; the company said potential liability, if any, could not be estimated.
  • Other notable items include $1.9 of investment losses, $1.0 of foreign-currency transaction losses, and $1.6 of contingent-consideration liability release income. The filing also identifies $10.0 of potential NRS share redemption, $23.0 of performance bonds and up to $11.1 of other potential payments, whose timing or amount is uncertain.
  • Management reported disclosure controls were effective at quarter-end and no material change in internal control over financial reporting. It reported no material change in previously disclosed risk factors.

Important facts for investors to verify

  • Whether growth in Fintech, NRS and net2phone can offset continued declines in Traditional Communications, and whether segment operating results persist excluding unusual gains.
  • The trend in NRS recurring revenue, POS terminals and payment accounts, and net2phone subscription revenue and customer acquisition costs.
  • Cash availability after accounting for restricted customer funds and other cash unavailable for general purposes, as well as the funding and execution of planned capital expenditures.
  • The outcome and potential financial exposure from the Straight Path litigation, USAC audit, regulatory fees and sales-tax matters.
  • The carrying value and volatility of debt and equity investments, foreign-exchange exposure, and possible payments or capital needs related to acquisitions, contingent consideration, bonds or NRS redemption rights.