IDT Corp (IDT) 2003 Q1 法說會逐字稿

Good afternoon, my name is Derek, and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the IDT Corporation first quarter earnings for fiscal 2003 conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2. Thank you. Mr. Courter, you may begin your conference.

Good afternoon. I'd like to welcome all of you to IDT's earnings call. I believe we had a solid quarter. After my remarks, you'll hear from Monty Lichtenstein, the CEO of IDT Telecom. He will then be followed by Brian Finkelstein, CEO of Winstar. Following Brian will be Mitch Berg, who heads up our media subsidiary, and then finally Stephen Brown, our chief financial officer. As I promised during the last earnings call, my remarks and the comments of the other executives will be shorter than last time so we can spend more time with questions.

Before we begin, I would like to caution all of those listening about any forward-looking statements that you may hear during the course of our conference call today. During the representations by executives and the question-and-answer session that follows, we may make statements that are not purely about historical facts, including but not limited to, those in which we use the words believe or anticipate, expect, plan, intend, estimate, target, et cetera. These statements constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

While these forward-looking statements represent our current judgment of what may happen in the future, actual results may materially differ from the results expressed or implied by these statements due to numerous important factors, including but not limited to factors described in our most recent annual report on S.E.C. form 10-K, under the heading "Management's Discussion and Analysis of Financial Conditions and Rules of Operations." In addition, these factors may be revised or supplemented from time to time and reported on S.E.C. forms 10-Q and 8-K. IDT is under no obligation, and we expressly disclaim any obligation to update the forward-looking statements made today, whether as a result of new information, future events, or otherwise.

I am pleased to announce that we have broken our revenue record for the fifth consecutive quarter. The combined revenue of our telecom and media units for the first quarter was about $396 million, an increase of 17% over the first quarter of fiscal 2002 and a sequential increase of 2% over the fourth quarter of fiscal 2002. EBITDA for these units during the first quarter was about $29 million, an improvement of 107% over the first quarter of last year.

In this economy, and within the telecommunications industry, sustained performance of this type suggests we're doing something right at IDT. Our growth may also be measured in our sales of prepaid calling cards. In every single month since March 2002, we have sold more 1 billion minutes of prepaid calling card services. IDT now sells six prepaid calling cards every single second. We are seeing increased calling card volume in the retail market. We expect this trend to continue as we expand in the private label market as well.

In early October, we inked a major new strategic alliance with Walgreens drugstore that will increase our retail visibility and our calling card volume. Thanks to the tireless efforts of our staff, new cards are currently being launched in Walgreens' almost 4,000 stores coast-to-coast right in time for the holiday season. A major print and in-store advertising campaign is under way at this moment that will promote these cards to over 50 million homes. In addition to being an exciting revenue opportunity, the Walgreens relationship will introduce the IDT brand throughout America and to many geographical markets that we have not actually penetrated to date. To show you the potential magnitude of this relationship, there are 30 million Americans that shop at Walgreens every single week, so we're really looking forward to the rollout.

We are also developing a corporate card to be used by employees who are working away from their offices. Corporate cards increase an employer's control over telecommunication functions while reducing the cost of staying in touch with his employees on the road.

There is good news at our media and Winstar units as well. Media posted an EBITDA loss for the quarter of $1 million on revenues of $5.8 million, an 80% improvement over last year's first quarter and a remarkable 71% improvement over just last quarter. Winstar communications unit has moved beyond assimilating the business purchased last December toward building that business in a way that leverages IDT's core capabilities. This quarter's Winstar EBITDA loss fell to $21 million from $41 million 2 quarters ago, $30 million last quarter. That's significant progress, but we're obviously not nearly satisfied.

These metrics aside, many of you know that balance sheet strength is what sets IDT apart. Unlike many of our competitors, we have not deteriorated our balance sheet in the pursuit of growth. IDT continues to have over $1 billion in cash and marketable securities and absolutely no debt.

I would also like to focus your attention on a significant change in our financial statements beginning this year, and this is important to keep in mind. We are now consolidating the results of our operations with Net2Phone, the NASDAQ quoted provider of voice and enhanced internet communication services. As you know, we founded Net2Phone in 1995 and took it public in 1999. Last October, a limited liability company controlled by IDT was formed with Liberty Media and AT&T to hold a substantial portion of the outstanding Net2Phone stock. These first quarter 2003 financial statements are the first ones to reflect the consolidation of Net2Phone on IDT's books in a long time.

On a final note, I'm pleased to announce that two outstanding individuals will be placed in nomination to fill vacancies on the board of directors later this week. The first is former senator Rudy Boschwitz, former senator from the state of Minnesota. The other is Mark Oppenheimer hyper, the president and CEO Crystal EX. Upon the election of these individuals, more than half of the members of the IDT board will not be affiliated with IDT management, and we will have achieved one more good governance goal.

IDT has been moving toward having an independent board for several years now. That has been our goal long before corporate scandals started making daily headlines and long before regulators deemed it necessary. For IDT, just having the majority of outside directors is still not enough. We have built a board of high-quality people, strongly independent, highly distinguished individuals. It is a board that would be suitable for the largest U.S. corporation.

While many of our competitors have fallen or are faltering, we are gaining momentum and improving. Our performance has been achieved not by good fortune alone, but by careful design, innovation and plenty of hard work. Special commendation goes to Howard Jonas, our founder, our chief visionary, our chairman, but thanks also goes to our entire team, a group of professionals that have a real understanding of the industry and whose maturity in judgment just keeps going.

The company was started just 11 years ago when management was in their 20s and 30s. They brought one simple telecommunications idea, callback, out of the wilderness 11 years ago, with no money, no serious backing, and built IDT into a $1.5 billion company with $1 billion in cash and no long-term debt. If they did all that in 11 years from a standing start, no telling what this team is capable of doing as they work together for the next two, and perhaps three generations.

And now, Monty Lichtenstein.

Thank you, Jim. Good afternoon, everyone. Over the next few minutes, I'd like to offer an update on IDT telecom's operations and give some guidance for the future.

In the first quarter of fiscal '03, we kept some important streaks going. Our revenues increased for the fifth consecutive quarter. Revenues totalled $391 million, representing an annual run rate of close to $1.6 billion. EBITDA rose to $30.3 million, our highest ever total to date. Free cash flow for the quarter amounted to approximately $20 million. We also enjoyed our fifth consecutive quarter of positive EBITDA, operating income and operating cash flow. Perhaps most impressively, our revenues, EBITDA and operating income have all increased sequentially in each of the past five quarters, so our profitability is stable and growing.

However, despite the results we were able to deliver, we have not put things on autopilot. We have not taken our recent success for granted. In this business, there's no such thing as a status quo. It's impossible to stay in the same place for long. If you're not moving ahead, you're taking a step back. My team and I are well aware of the fact that we need to maintain our focus on both growing the top line while maintaining or improving our core structure. In this way, we'll be able to continue to deliver the results our shareholders have come to expected.

This became evident to us during the first quarter. You wouldn't know it by simply looking at our strong numbers, but I must say the first quarter was a challenging one. Market conditions remained difficult and we saw some increases in our termination costs for key destinations and our calls toll-free 800 traffic. We also faced network capacity complaints due to strong growth in minutes of use, and this led to small temporary narrowing of telecom's gross margins in Q1.

Telecom margins narrowed by 50 basis points in 24% in the fourth quarter of '02 to 23.5% in the first quarter of '03. This is still well above the gross margin of 20.2% recorded in the first quarter of last year.

As our minutes of use continue to grow and our network expands, it will become an increasingly complex path to route our minutes in a way that will guarantee the highest possible profit. This is why we spent a great deal of time analyzing and improving the way we route minutes over our network. By doing so, and by leveraging our tremendous buying power, we will be able to keep the costs low and our margins high.

Looking ahead, the challenges we experienced in the first quarter are largely behind us, and we are currently about halfway through the second quarter, and I can say with some confidence I expect solid growth in revenues and profits over first quarter levels. Our wholesale carrier positions has enjoyed the highest revenue month in almost two years in November. In both our foreign card and wholesale divisions, we are well poised for record volumes as we enter the holiday season, traditionally our strongest period of the year. I'm looking for top-line growth in each of our major lines of business with some margin improvement as well.

All in all, I am very excited about the possibilities for the second quarter, and I think that our EBITDA once again will establish a record for IDT telecom. In terms of more specific items for Q2, on the revenue side, I expect to see a decrease in the low single digits to over $400 million in Q2. Anticipate that gross margins will improve from Q1 levels and approach the levels we saw in Q3 and Q4 of last year. I expect EBITDA in the $32 million area in Q2.

For the full fiscal year, I believe we remain on track to offer the guidance we offered on the last call. Revenues of at least $1.65 billion, representing a 15% increase from fiscal '02. EBITDA of at least $125 million, up about 35% from last year. Free cash flow, which to me is the really most important number, in the $60 million to $75 million range, depending on the level of capital expenditures for over a year.

Speaking of capital expenditures, we need to expand our global network in order to accommodate anticipated continued explosive growth in our minutes of use. We are currently installing a second international gateway switch in the U.K. and begun work on installation of a fifth international gateway switch in the U.S. Before the fiscal year is over, we expect to add a sixth international gateway switch in the U.S..

Before we decided to move ahead with these rollouts, however, we analyzed the project to be sure they met our strict standards for return on investments. We've never grown our company solely for the sake of growth and we're not about to begin doing that now. Rather, we are investing some of the cash flow we generate back into the business, generating high returns on our investments. By doing this, we are laying the foundation for further minutes, revenue and profit growth.

Now, let me talk about some of the highlights of our business and where I think we're headed. In our largest and most prominent business, the US calling card business, we continue to experience top-line growth. During Q1, we introduced several new aggressively priced cards designed to help us make inroads into certain key demographics and geographic markets. Although these cards initially put some pressure on overall growth margin performance, it will eventually form the core of our portfolio of calling cards. I call this our portfolio life cycle approach to calling card business, to continually offer new and different cards while maintaining a more mature and most profitable cards.

In terms of the future of the business, I feel we need to build upon two basic strengths in that business. One, the unparalleled power of our distribution network and, two, our knowledge of and experience with various ethnic markets. In the near future, we will expand this business beyond the realm of telecom by using our distribution to get various products and services in the hands of our targeted customers.

The results from IDT Europe have been particularly strong especially on the calling card side, so our aggressive growth plans remain on stack. We continue to capture market share in our core U.K. market, where we believe we are the number one provider of calling cards. In addition, we saw solid growth in Spain, the Netherlands, and Germany in the quarter. We are now entering the France and Italy market as well as Scandinavia in our attempt to make this business a truly pan-European operation.

We are also currently exploring several other retail businesses in Europe as we believe that the time is right to expand our business portfolio there. We plan to generate new revenues from retail businesses before the end of the fiscal year. IDT Europe currently features a net revenue run rate of some $300 million a year, and I think there's a whole lot of room on the upside for that number in the future. Most importantly, we're generating solid profits in Europe, and I'm very pleased with the job our team has done there.

The consumer long-distance business remains our fastest-growing business. CLD revenues rose another 10 percent quarter-to-quarter, and we're 61% higher than during the same quarter last year. We're now up to 600,000 active customers and we continue to spend aggressively to further increase our customer base. We're investing today for greater profit in the future.

The future of our CLD business is predicated on three basic principles. One, drawing the customer base to aggressive, low-cost customer acquisition. Two, focusing on proven collections and customer retention. And lastly, adding more services, such as local phone service, to our existing service offerings in order to increase our average revenue per customer. In the coming quarters, I hope to share with you reports of our progress on all three fronts.

Our private-label division is still relatively small, made a big splash during the quarter by winning the Walgreens calling card account. This contract, which we believe should result in a minimum of $45 million in revenues annually, marks our first major entry into nationwide retail chain store markets. The cards have already been rolled out, and within a few days, we expect that the cards will be fully launched with aggressive marketing and 4,000 Walgreens locations across the U.S.

Going forward, we plan to build upon the success by going after and winning some other major accounts of the same magnitude. On the geographic expansion front, South America represents the next frontier for IDT telecom. We've been speaking about the importance of this region for a while and we've recently begun to generate some revenue in Argentina and Peru.

Throughout fiscal '02, we made infrastructure investments necessary to [Inaudible] our anticipated growth in that area. I expect to see strong gains in South America during fiscal '03. There's certainly a lot going on in IDT telecom, and I'm very pleased with the results we've been able to deliver. I'm even more excited about the future, beginning with the current quarter Q2 of fiscal '03. I look forward to speaking with you again soon.

Thank you for listening. Now, let me turn the call over to Brian Finkelstein. Thank you.

Thank you, Monty. Good afternoon, everyone.

I'm very pleased to report that we met the targets given during our last call. Winstar earnings before interest, tax, depreciation and amortization amounted to a loss of $22.2 million for the first quarter of fiscal 2003. This represents our third consecutive quarter of fast-paced progress toward profitability.

As you may recall, we reported an EBITDA loss of $40.9 million two quarters ago and a $30.2 million loss last quarter. The majority of these gains came from the continued reduction of expenses associated with network connectivity, employee compensation and benefits, as well as rent.

While a 45% improvement in EBITDA over a six-month period is an extremely impressive achievement by any measure, we realize we're still a long way from where we want to be. As such, we have remained focused on executing our strategy while implementing new revenue and cost initiatives. I'd like to share some of those with you now.

We have just recently added voiceover IT to the suite of products our sales force can offer to the enterprise market. Once again, in order to maximize cost-selling opportunities among the various IDT and Net2Phone divisions, it was decided the VOIT market was well suited to Winstar's customer base and could be more aggressively marketed through Winstar's larger sales force. Presently deployed in the New York metropolitan area, we will be rolling out this offering in other markets, such as Boston, Los Angeles, and Miami, in the upcoming months. VOIT is one more product that distinguishes Winstar in terms of its ability to deliver reliable telecommunications services. This complements our existing local and long-distance voice service, high-speed internet and other broadband services that are offered at highly competitive prices.

We are leveraging the IDT relationship in various other ways. While some of our competitors are raising prices, we took advantage of IDT telecom strengths in the long distance market and launched a holiday promotion, offering long-distance rates at 4 cents per minute to potential clients in our building. We expect to introduce more competitive international long-distance rates in the near future.

I'd like to take a moment to thank Monty Lichtenstein, IDT Telecom's CEO, as well as the rest of his organization, for the cooperation and support they've provided Winstar. Thank you, Monty. I look forward to our two organizations continuing to work together to make IDT stronger, bigger and more profitable.

On the expense side, we have various ongoing initiatives. There's one in particular I would like share with you. We call it the LF wireless project. For those of you not familiar with our technology, we connect our client locations to our hubs where we aggregate traffic using our wireless technology, but we typically have to pay the local exchange carriers, of LECs, for terrestrial capacity linking the hubs to our switches. The LF wireless project aims to replace the LEC provided terrestrial capacity connecting the hubs to the switches with our own wireless technology. In addition to reducing our costs, this initiative more importantly extends our control over our customers' traffic and provides further redundancy for our customers by reducing their dependence on terrestrial capacity to carry their traffic.

While we are excited about the various initiatives that are within our control, we are being confronted with a market environment that is challenging to say the least. The stagnate economy is clearly extending the sales cycle and delaying purchasing decisions by our prospective clients. We are committed to confronting the situation by driving harder, expanding the sales force and being more innovative in the marketing of our product offering. As an example, we are exploring joint venture opportunities with disaster recovery and health care organizations, in both cases, looking to leverage the distribution power of other organizations that deliver Winstar products.

In terms of providing guidance, we anticipate an EBITDA loss in the range of $18 million to $20 million for current quarter ending January 31st. In terms of providing guidance, we anticipate an EBITDA loss of $18 million to $20 million for the current quarter ending January 31st. This represents a slowing down of the pace at which we have been reducing our losses. This is mainly attributable to the fact that a majority of the large cost-cutting initiatives have been completed, and we do not foresee the current holiday quarter as being conducive to particularly strong growth on the revenue side.

Summing up, we have continued to make great progress in turning Winstar into a winning organization as evident by our metrics over the last three quarters, and while a great deal of work has been done, we recognize the most challenging road is still ahead. However, given the level of commitment exhibited to date, both by Winstar employees and the entire IDT organization, I am supremely confident we will reach our ultimate goal, a truly great and profitable company.

And now, I'd like to turn the call over to Mitch Berg, CEO of IDT Media.

Thank you, Brian.

IDT Media is a very dynamic division. And I would like to update you on our progress.

I would like to start with our CPM brochure distribution unit. This is a successful, established business, and I'm proud to share with you that despite the challenges facing the travel and tourism sector, our top-line sales for the past 12 months were slightly above that of the previous year. This would not have happened without a dedicated effort of a great team at CPM. We had the foresight to make strategic acquisitions in addition to diversifying into new distribution areas. Looking forward, our CPM management team will focus on improving EBITDA as well as looking for new areas, geographic as well as new distribution areas within our current service area, to drive top-line sales.

Our radio division continued to make progress in terms of identifying new talent, building audience and increasing advertising sales. In our last call, we focused on new talk America personalities such as Shmuley Boteach, Heloise, and a new show from Mort Crim. They're responding to these offerings, whom are now heard in 4 of the top 10 media markets. Heloise and Mort's features were picked up by 170 music-of-your-life stations.

Our strategy of focusing on weekday programming that is cleared on rated stations has produced a trend of audience growth that we will need to succeed. When you have the programming that people desire and an aggressive new sales partner in Dial Global, the results are positive. Revenues at talk America are up and we believe the trend will continue to accelerate as we participate in the national radio up front market with our larger audiences.

One of the keys in growing a network is to serve areas unserved or underserved by others. As we move forward, we believe we've identified such an area in the talk arena. Talk listeners are middle aged, better educated, affluent, and moderate leaning right in their political views, yet the current talk radio offerings today do not adequately serve this audience segment. Younger listeners receive banal content through the so-called hot tub format. Other talk listeners receive the biased offerings of noncommercial radio or suffer through a tiring diatribe of self-righteous, self-congratulatory, strident talk personalities.

The opportunity is to serve this audience with a new brand of talk, one that is intelligent, articulate and entertaining with balance and without bias. IDT media has spent the past six months identifying and inventing new radio talent that can deliver upon this objective. We are proud we've identified four new personalities, are in active negotiations with them, and have reached agreements in principle with two of them. As is our policy, we will announce their names when contracts are signed.

Work on building out our personal owned and operated station continues at WMET, Washington, D.C.. The FCC transferred this license to us this summer, and the buildout of the station to 50,000 watts daytime continues. Construction of our office and studio complex in downtown Washington will begin this week. We will add the new talent that we discussed earlier in this call to a line up that already includes Charles Crowdhammer and Shmuley Boteach. The station will be the must-be listen alternative in the nation's capitol, and we will syndicate this programming for stations across the country.

We continue to explore strategic acquisitions in the radio area that will improve our distribution, affiliation and revenue base. We have gone through the dance with several partners and we'll execute deals that will have the potential to yield the results that we desire.

In our digital productions solutions unit, we have great news from GAS, our global 3D animation studio. We're working on 26 episodes of Monsters By Mistake, an animated series seen on Telemundo in the U.S., in Europe on RTL, in Canada on Y-TV, and on the Disney Channel in Australia. Our product is outstanding, and it delivers on the promises of superior product, advantageous pricing, and greater management control.

We have also developed our own animated product, Hip, Hop and Hamilton. Our pilot of the series has been very well received by distributors, licensing professionals and by textbook publishers. Look for exciting news to be announced on this project.

Development on our Winstar TV network continues on schedule. The TV offering will provide broadcast quality TV news content to desk tops across the Winstar platform footprint.

Operationally, we have a completed product that is now being tested at an internal site in New York as well as at current Winstar client. Our goal is to roll out and market this product to Winstar clients by the end of the first quarter of 2003. Our business model will focus on subscription revenue initially with advertising as a secondary revenue stream when critical mass is achieved. Further, with a proven successful product, we will then invite other private internet providers to license this product for their client.

Our IDT services group is on target in developing programs that will allow outside programs to develop marketing relationships with IDT customers. We have successfully completed year one of a project with a major financial services firm, and the project is continuing as scheduled. We are also marketing an educational offer to our callers, and this client recently asked us to expand the marketing efforts. We believe that we have developed a new media opportunity that uses a performance-based, totally scalable model. This is the model that advertisers are moving toward and one that traditional media cannot match.

In summary, business at our established unit is good and we have established the goals to make it better. Revenue at the unit is improving and we are on plan to continue that improvement. Importantly, IDT media has new products in the pipeline that are equally promising. Importantly, these products are in the hands of an extremely talented, energetic and passionate staff, each one focused on building their businesses, and progress toward profitability is definitely being achieved at IDT media.

It's my pleasure to introduce Steve Brown, CFO of IDT.

Thank you, Mitch.

Our first quarter of our fiscal 2003 again proves the maturation of our businesses at IDT. IDT telecom again showed a strong bottom line, proving that it can sustain organic businesses as new initiatives are nurtured.

Winstar continued to cut its cash burden and operating results and expects this trend to continue quarter to quarter. IDT Media continued to show operational improvement in its quest towards profitability. And this quarter, as we discussed before, we consolidated the operations of Net2Phone into our results. Net2Phone, like Media, continues to show improved operating results and is approaching cash flow break-even, which should happen sometime during this fiscal year.

Now, in more detail, we'll go through each segment. We will do this comparing this quarter to last quarter. First, telecom.

Retail telecom revenues increased 3.6% from $296.2 million to $306.8 million. The two major components of this increase was a 10.4% increase in domestic long-distance revenues, from $32.3 million to $35.7 million, and worldwide debit card revenues increased 2.8% from $263.4 million to $270.7 million.

Wholesale revenues decreased 4.6% from $87.5 million to $83.4 million. The largest cost of this reduction was due to the consolidation of Net2Phone, in which we have to eliminate intercompany sales from IDT to Net2Phone. These sales totalled approximately $3.2 million this quarter. These sales were included in wholesale revenues result last quarter because we did not consolidate Net2Phone. Without this difference, wholesale revenues have been marginally flat.

Overall, telecom gross margins remained relatively flat, decreasing 50 basis points from 24% to 23.5%. The components of this decrease included a 290 basis point decrease in wholesale gross margin from 12.9% to 10% this quarter. And retail gross margins decreased marginally from 27.3% to 27.2%.

Telecom SG&A as a percentage of revenues decreased 40 basis points this quarter from 16.2% to 15.8%. Telecom depreciation as a percentage of revenues marginally decreased from 4% last quarter to 3.9% this quarter. Telecom EBITDA as a percentage of revenues remained unchanged at 7.8% and net income from operations after $1.5 million impairment charge on an abandoned fiber connection decreased from 3.7% to 3.4 of total Telecom revenue this quarter.

Now, Winstar. Winstar's results for Q1 showed declining revenues quarter to quarter due to the completion of the migration of the unprofitable retail customers and the revenues decreased from 27.3 million to 24.5 million. Direct costs decreased more rapidly, from 33.2 million to 28.5 million this quarter. SG&A costs improved 25%, 24.3 million to 18.2 million. Depreciation and amortization improved from 3.4 million to 2.5 million this quarter, and the EBITDA loss improves 27% from 30.2 million to 22.2 million this quarter, and the net loss from operations also improved -- improved at a 27% rate to 33.6 million, to 24.7 million.

Now, media -- media's results for Q1 also showed operational improvement as promised. Revenues remained relatively flat from 5.7 million to 5.8 million, but EBITDA improved from a loss of 3.6 million last quarter to a loss of $1 million this quarter, and the loss of operations improved from 3.6 million to 3.1 million this quarter. The decreased loss was due to the streamlining of operations at Talk America, WMET, DPS, Winstar TV, as well as continued improvement in DTM and discontinuance of (unintelligible).

Net2Phone's results for Q1 were: the revenue net of intercompany transaction was 22.7 million, direct costs were 12.6 million. SG&A costs were 15.3 million. Depreciation expenses of 2.5 million, and impairment gains that went on the operating line due to the settlement of the Cisco deal was 53.3 million. EBITDA loss was 5.3 million, and income from operations was 45.5 million.

We consolidated Net2Phone again because we have effective control of the company even though if the LLC was divided, we would only own 17% of Net2Phone stock. The 83% difference is adjusted on the P&L through the minority interest line item.

Corporate SG&A expenses increased 22.5% from 6.5 to 7.9 million. This is mainly due to an increased cost of corporate governance today and being a public company in the post-Enron and Worldcom environment, and as an example, it includes significantly higher office and liability insurance costs as well as increased professional fees dealing with matters related to (unintelligible). Also this quarter, and probably for the next couple of quarters, we incurred increased legal expenses relating to the heating up of the two major losses in which we are the litigants and this is relating to the telephonic and (unintelligible) lawsuits.

Overall, consolidated, we recorded revenues of $443 million, a new record for us, of course, then income from operations at 24.3 million, and EBITDA loss of 6 million, mostly due to Net2Phone, and a net loss of $4 million. Most importantly, we are still maintaining our cash and cash equivalents at $1.1 billion and our deferred tax liability is reduced to $228 million.

At this point, we would like to open up the call to questions from our listeners.

At this time, I would like to remind everyone in order to ask a question, please press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Peter Gore with Card Gap.

Hi, congratulations, guys. Can you discuss a little how you plan on monetizing your investment in Winstar, and it seems you guys are on right on track, and discuss how you plan on monetizing your investment in Winstar. Hello?

IDT was quite successful with respect to Net2Phone and when we tried to monetize. These are forward-looking statements, but needless to say, we'd entertain private investment people going to the public markets, at the appropriate time, we also look at the public equity markets, and we do the same thing with Winstar, such a success for Net2Phone. But the important thing to keep in mind right now, if we do this, if companies have a wonderful opportunity to participate in the ground floor of Winstar, Winstar will be asking them for their business, and that's what we'll be telling people that have an interest in getting an early position. Thank you for your question.

Your next question comes from Andrew Sidote with William Smith & Company.

Hi, I appreciate the more detailed breakdown on Winstar results, and I also understand that you have old stuff that you don't want coming off your top line, and hopefully new revenue coming on, but my question is basically provide us with some evidence that sales people that you've hired, starting in May, are gaining traction. In other words, as the top line stabilized (unintelligible) it's actually growing at Winstar?

Andrew, basically what we have is that -- and it wasn't an easy process, because we moved the billing system over to the -- for the most part, over to the IDT billing system, but what we do do is track all new revenue that's coming in. The biggest challenge for us has been, you know, disconnect. Not disconnect from the customers that have been sold by the new Winstar, but the old disconnect, the old disconnect. It's very much a manual process, and we're almost there. But I have to tell you, we're not 100% there. We're still in the process of going through those last customers, and, you know, where we don't see traffic on certain lines, to just ensure that they are existing with our cost customers, and, in fact, in many of those cases, they were customers that had disconnected quite a while ago, and were never disconnected out of the Winstar billings system, so that's a manual process which almost completes, we don't anticipate it will have any material impact at all on our financials, but, you know, in terms of what the sales people are introducing, the reports we have, they're readily available.

Okay, but at this point, in order, you can't say for instance that the -- you know, the revenue that you had in the month of October was actually higher than what you had in September? That kind of a metric?

That would be very difficult. It would be very difficult. I mean, we can see that we have it on a city basis. We have it based on various sales channels where we track the new sales. The problem is, you know, as I said, when we get the disconnected information, it's hard to match it up to a specific month.

Okay. And if I could, the GSA contract, I know it has an evaluated value of 560 million. What exactly does that mean for Winstar in terms of revenue and how that will be hitting the top line?

The numbers we had released were numbers that were the total amounts of the contract. But naturally, no one provider is going to get an enormous percentage of that. In terms of what that means for us, I mean, we're now actively engaged with the GSA and trying to win as many of those contracts as possible. We've had -- we have a number of large contracts that have either been signed or nearly signed. We signed a very nice contract in St. Louis. We're close to closing in Los Angeles. Various governmental agencies, and that's moving ahead nicely. Understand that when you're dealing with the government, just because the contracts have been novated from the old Winstar to the new Winstar doesn't mean now all of a sudden things operate with lightning speed. It's a slow process, you know, again the best customers in the world to have, but they can be the most frustrating in terms of making sure that all the Ts are crossed and the Is are dotted, but we are moving ahead and we'll be seeing tremendous and very, very dramatic growth in the next fiscal year.

Are you still on track to break even by the fourth quarter of fiscal 2003?

Our goal is still to break even by the end of 2000.

And that's for the entire quarter or just the closing month?

No, for those closing months. We haven't fine-tuned it to the point I can speak about a month versus a quarter, but certainly we're looking to break even by the end of the year.

And, Steve, the working capital contribution that brings Winstar to break-even, in the the past, I think the number that you related was 85 million. Has that gone up?

Working capital number is now close to 95 million.

Close to 95?

Correct.

And then, Monty, the question on the telecom, I know you've done a good job of staying a couple steps ahead. We know the situation where the permanent price of the retail and wholesale divisions were come down, but the costs were falling even faster. My question is, have you reached a point where if the per-minute price utilization continues to decline, that you will no longer be able to match that by lowering your costs, and if not, then what leverage do you have available to offset that?

I would say, first of all, the economy's a buying power puts us in a better position than our competition. Terminating 800 million plus minutes a month gives us control in certain leading positions in the costs to such termination, but although in a market prices declining, we are at least at the top of the scale to make sure we benefit from those costs and realize that on the top-line dollar. Yes, the costs are declining on sales price, but quarterly drop in the cost side, and I believe going forward for the next number of quarters for sure is (unintelligible) that we are probably positioned to remain profitable.

Okay. And just a quick question of the Walgreen contract. What are the margins like on that?

The margins are quite thin in respective of existing businesses. Our focus is to grow the business, not fully be a domestic business, but also on the international side. So that existing domestic business, thin margin business, our strength on the international side, and we see a great profitability on this contract.

Okay, so you're saying the Walgreen contract, the margins will actually be lower than your current margins on your prepaid calling card?

The base revenue from the existing business from Walgreens will be lower than our profit that we realize in our traditional calling card, but within a few months, I believe that those profits can exceed the margins on our existing calling card business, to the direct distributor, direct to Walgreens.

Okay.

And let me just mention something, I'm just so excited about this Walgreens situation, because it exposes, you know, a fundamental IDT product. The key product that we have right now, an that's the prepaid calling cards. You know, to a whole different demographic sector of American. As I mentioned in my prepared remarks, I said 30. There's actually 32 million people that go to Wal-Marts -- Walgreens, excuse me, every single week and make a purchase. They will be toward the end of this month, in December, 32 million Americans will be walking by IDT prepaid calling cards with the logo emblazened there on, so new demographic, exciting opportunity.

Okay, thank you very much.

Your next question comes from Jeff Greeny with Addison Clark.

A couple of questions regarding Winstar. What percent of your customers are on net? And what is the status in terms of churning some of your off-net customers away? And then, finally, just the status of the tax liability. I heard you mention at the end of the call, but I didn't pick it all up. Thanks.

I didn't catch your second question. The first question is what percentage of our customers are on net, and it's roughly 50%.

Five-oh?

Yes.

Where do you see that trending --

That's trending higher.

It's trending higher.

Just to give you some perspective on that, I would say go back the last quarter, that number was probably closer to about 40%, and I would expect it to be closer to 60% next quarter.

And just the economics between an on-net versus on off-net are what?

Well, the basic economics in terms of profit margin are an on-net customer are the margins are, depending on the city, depending on the building, could be north of 50%, possibly even close to 70%, believe it or not.

Right.

Depending on the billing and the location.

Right.

Off-net, you're talking about much smaller numbers, we recently did a -- we signed a rather large deal off-net where the profit margin was about 30%.

Okay.

That was actually quite good for off-net piece of business.

Okay. And in order to get to break-even, what sort of penetration do you need on your, you know, are you looking for?

Okay. Let me just address that in the sense that we've spoken about penetration rates and the impact that has on break-even.

Right.

There are a number of ways we can reach break-even. One way would obviously be to increase the penetration rate within our 3100 building. That's one way. But we're also very aggressively pursuing signing up larger enterprise customers and wiring those buildings. So if we were simply going to be limited to those buildings within our network right now and said, where do we have to be in order to break even, the answer would be, we'd probably have to be at a penetration rate of revenue at about 4.5%.

Okay.

But again, understand that that's just one way we can obtain break-even.

Okay. Thanks. Lastly, just regarding the tax liability, what's the status with that? I know you have some tax -- deferred tax assets, and how's that work?

The deferred tax liability is long-term and it stands at this quarter $228 million.

Okay. Okay. Thank you.

Your next question comes from Theodore Duncan with Good Pastor Investments.

More questions on Winstar. I think that one of them was just answered. With $100 million run rate, well $25 million run rate, I think you're losing about $20 million per quarter, so I had guessed that you were with a 50% margin, which would more or less double revenues. I think that all of the things being constant, you just said that you had to get the 4.5 penetration in your buildings that you now have wires, and I think around two or so, so those numbers seem to click. Am I about right on what I'm saying?

You are.

And on another question, and I don't think this was asked, can you tell us what these tax laws carry forward that the company will get from Winstar is, because I believe this is final and you have it now. That may be wrong, but I think that's correct.

I'm not exactly sure what you're asking. If you're asking when we purchased Winstar, if we purchased net operating loss carry forward that we can utilize.

Yes.

Unfortunately, we cannot. There's almost no vehicle possible where you can acquire somebody else's net operating loss, and that was also the case with Winstar.

Okay. Could you use it with Winstar net income?

No. The law says that Winstar is incurring IDT can use it to offset its tax liability, but if Winstar would make a billion dollars a year within the next 10 years, we can't get all of the old Winstar's net operating --

Okay. I misunderstood. I got wrong information. I apologize for that. Can you -- I know you won't, but I'm going to ask anyway, if we look at the current building thing, we forget wiring new buildings and doing all the stuff you're going to do with integrating it, with the long distance and so forth, what is an obtainable penetration rate for very successful buildings? I really couldn't tell you if it was 10% or 20% or 4.5%.

Well, I can only say that 4.5% is certainly reasonable.

Well, yeah, I hope so.

You know, in terms of, you know, how high a percentage, you know, how high the percentage, and we have a tremendous amount of confidence in our service and in our network, and we feel it's not going to happen overnight, but we feel that over time, we're going to be just -- you know, a -- a type of force to be reckoned with if you talk about 10% or in a building, or 20%, it won't be unrealistic, but I think for now, our focus has to be on break-even and within our building, that's the goal.

Oh, yeah. I was taking a three to five-year time horizon. I was in no way looking at the next quarter. I was looking down the road. I've seen some of the Winstar buildings, they have lots of clients, and, you know, as long as you have a tremendous price advantage, and I think you have redundancy advantage and, you know, I can talk about Winstar forever, so it does seem --

Go ahead, please.

Yeah. When there are people on this call that know why I can do that, but we won't leave it here. But I just think that you can get a substantial market share over four to five years, and I won't ask you nor will I define substantial but much higher than 4%. And I thank you for the call. It wasn't meant to be a speech. I apologize.

Keep in mind we are aggressively looking to hire good sales people so we can -- after this call.

Thank you. I'd rather invest in the stock than go to work for you.

Your next question comes from Peter Isle with Cider Capital Management.

Yes, good afternoon. Brian, I was wondering if you could know exactly what was the percent of revenues in the quarter that were related to customers acquired the new sales force.

I'll tell you, at best, it would be guesswork, than to be perfectly honest. Understand something that the process that we've been involved in and we're still involved in, in terms of moving customer business over to the new IDT building and whatnot, while at the same time dealing with a very, very old disconnect, is an extremely time-consuming one, and, you know, getting everything right for our customers always takes precedence over getting, you know, all of the various types of metrics we would like to see. I would love to say I can pull out a piece of paper and being able to share that with you. If I had to guess, though, if I had to guess in terms of the total number of new sales as a percentage of the total revenue, you wanted on a quarterly basis --

Yeah. I guess I'm looking for some metric to instill confidence that the value proposition offer the customers is working.

Right. I would say probably in the neighborhood of about 7%.

And what are the revenues, what's your guidance on revenues for Q2? You mentioned the dollar -- what about the revenue?

The reason why it's a little difficult is that November and December are traditionally very, very difficult months for enterprise sales across the board, you know? And that's why -- that's why I said in my comments earlier, roughly 18 to 20 for that quarter, but having said that, all indications are that across all of our sales channels, that activity is picking up and we feel we're moving ahead in the right direction.

It should be higher this quarter, correct?

We have every intention of a higher number this quarter.

And the LF project, what's the cost of that and what's the payback?

The cost is really minimal. It's a way that the network has laid out, and we were looking at ways we could reduce costs and we've already identified roughly a million dollars a year of cost savings based on rerouting.

And you're saying the cost is -- the cost is minimal. Okay.

And I would say of that million dollars that we're going to realize, the actual savings would be north of 900,000.

Okay.

We'll take one more question.

Yeah, one quick one. Was that calendar year or fiscal year '03 in terms of break-even?

We were talking about calendar year.

Calendar year. Okay. All right. Thanks very much.

One more caller.

Your last question comes from Charlie Page with Grayling Capital.

A couple of questions on Winstar. Did I hear you say you transitioned out of your unprofitable customers that you were looking to migrate off to somebody else?

No. We didn't -- we never went through an exercise that we migrated off of all of our unprofitable customers.

No, I mean there were certain ones you were hoping to shed, I believe?

Well, that was a while back where we started the process of getting out of our -- for the most part, our type two which is as well as our resale business. For the most part.

Okay. Moving on, any chance you could break out what the revenues from the U.S. government were to the Winstar business in the quarter and the prior quarter?

The revenue numbers from the -- understand that basically, the government business is a brand-new business for us. Most of the contracts that were signed with the old Winstar were signed shortly before they went into bankruptcy and naturally, everything was put on hold.

Right.

We just had those contracts novated, and now we're in the process of bidding and getting those contracts signed, sealed and delivered, so we're now at a run rate of two -- $250 thousand a month out of the government business, but understand it's early days, it's a process that just started.

Okay. And can you provide any customer numbers or average monthly bill rate metrics for Winstar?

Yeah, our average customers billed roughly $600 a month.

Thank you.

At this time, there are no further questions. Do you have any closing remarks?

Thanks for joining us. We're continuing to do what we know how to do. We're doing it well, we think, and we look forward to the next conference call.

This concludes today's IDT corporation conference call. You may now disconnect.