IDT Corporation — Form 10-Q Summary
Business context and reporting period
Quarter ended October 31, 2016, the first quarter of fiscal 2017; amounts are unaudited. IDT is a multinational holding company primarily operating in telecommunications and payments. Its reportable segments are Telecom Platform Services, Unified Communications as a Service (UCaaS), and Consumer Phone Services. Zedge was spun off in June 2016; its prior-period results remain in the reported comparisons.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $369.2 million | $390.6 million |
| Gross profit (revenue less direct costs) | $56.1 million; 15.2% margin | $66.1 million; 16.9% margin |
| Operating income | $5.2 million; 1.4% margin | $7.9 million; 2.0% margin |
| Net income attributable to IDT | $21.9 million | $4.2 million |
| Basic / diluted EPS | $0.97 / $0.96 | $0.18 / $0.18 |
| Cash provided by operating activities | $5.5 million | $14.0 million |
Revenue declined 5.5% year over year. Telecom Platform Services revenue fell 4.9% to $360.0 million; UCaaS rose 1.3% to $7.1 million; Consumer Phone Services fell 18.5% to $1.5 million. Within Telecom Platform Services, Retail Communications decreased 8.3%, Wholesale Carrier Services decreased 5.6%, and Payment Services increased 7.4%. Operating income declined 34.6% as falling Telecom Platform Services revenue and a higher direct-cost ratio outweighed lower expenses.
Reported net income benefited substantially from a $14.4 million income tax benefit, including a $16.6 million benefit from recognizing deferred tax assets after removing a valuation allowance at Elmion Netherlands. Other income was $2.4 million, primarily reflecting $2.1 million in foreign currency transaction gains. These items boosted earnings despite lower operating income.
Cash, liquidity and debt
- At October 31, cash and cash equivalents were $91.9 million, restricted cash was $81.1 million, and marketable securities were $57.8 million. Cash, cash equivalents and marketable securities totaled $149.7 million; some cash is substantially restricted or otherwise unavailable for general use.
- Working capital was negative $1.5 million: current assets of $318.7 million versus current liabilities of $320.2 million. Customer deposits were $79.5 million and largely relate to IDT Financial Services.
- Cash declined $17.6 million during the quarter. Investing used $18.5 million, including $8.0 million for investments and $11.0 million for marketable securities purchases; financing used $3.1 million, including $4.4 million in dividends.
- No borrowings were outstanding under IDT Telecom’s $25 million revolving credit facility, which matures January 31, 2018. The company reported compliance with its covenants. It had $102.7 million of affiliate and subsidiary loans and advances against a $110 million covenant limit.
- Capital expenditures were $5.5 million. The company declared a $0.19-per-share dividend payable in December 2016.
Outlook, risks and notable items
- Management expected operating cash flow and cash, cash equivalents and marketable securities on hand to cover anticipated working capital and capital needs for the twelve months ending October 31, 2017. Planned capital expenditures for that period were $19–$21 million. Management also expected additional Cornerstone investments in fiscal 2017.
- Management cited industry-wide rate declines, including intense competition on U.S.–Mexico calling, as well as competition from wireless operators and internet-based communications. Telecom Platform Services minutes of use fell 12.1%; its direct costs fell more slowly than revenue, increasing direct costs as a share of revenue by 1.5 percentage points.
- Management expected Consumer Phone Services’ customer base and revenue to continue declining. UCaaS investment in sales and IT employees was expected to continue; PicuP was in open beta, and an updated Boss Revolution app was launched on Android, with iOS launch expected in early calendar 2017.
- IDT and its controlled 50%-owned CS Pharma subsidiary held a $10 million, 3.5% Cornerstone convertible note due September 2018 and warrants that could represent up to 56% of Cornerstone’s fully diluted capital. IDT reported a maximum exposure of $10 million to loss on its Cornerstone investment. The CEO’s family and foundation also held Cornerstone notes.
- The FCC requested information concerning potential historical license violations by Straight Path Spectrum, a former IDT subsidiary. IDT was responding and noted potential fines, regulatory penalties, civil liability, or a claim from Straight Path. The company recorded $0.2 million in related legal fees. IDT also appealed the dismissal of its Tyco-related complaint.
- IDT had $13.4 million in performance bonds outstanding, as well as $1.6 million in purchase commitments. Management said the remaining corporate reorganization plans could change and required Board approval.
Most important facts for investors to verify
- How much of the sharp increase in net income and EPS came from the one-time deferred-tax benefit, and what earnings look like excluding it.
- Whether revenue and margins in Telecom Platform Services stabilize amid declining call volumes, rate pressure, and competition.
- Usable liquidity after accounting for restricted and operationally unavailable cash, and cash conversion given the quarterly operating cash-flow decline.
- Progress and returns from Cornerstone investments, related-party interests, and the potential dilution and terms associated with its warrants.
- Developments in the FCC inquiry and Tyco appeal, including possible financial exposure; the filing does not provide a clear estimate of potential FCC liability.
- Execution of the stated capital-spending and growth plans, and any impact of New Jersey tax-credit requirements or future corporate reorganizations.