IDT Corp (IDT) 2003 Q2 法說會逐字稿

Good afternoon, my name is Adrian and I will be your conference facilitator. At this time, I would like to welcome everyone to the IDT Corporation fiscal 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time please press star then the number one or your telephone key pad. If you would like to withdraw your question, press star and the number 2 on your telephone key pad. Mr. Jim Courter you may begin your conference.

Good afternoon, this is Jim Courter I'd like to welcome all of you to ITD's earnings call for the second quarter which ended January 31st 2003. After my remarks you'll here from Motti Lichtenstein(ph) the CEO of one of our major subsidiaries areas IDT Telecom, then Brian Finkelstein, CEO of IDT’s solution subsidiary, followed by Mitch Burg (ph), our media subsidiary. After Mitch you will here from Steve Brown our Chief Financial Officer. After Steve's presentation, we'll take questions.

Before I begin, would I like to caution all of those listening about my forward-looking statements that you may hear during the course of our conference call. During the representations by our executives and then 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, 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.

These forward-looking statements represent our current judgment what may happen in the future actual results may differ materially from the results expressed or implied by these statements due to numerous important factors, including but not limited to the factors described in our most recent annual report on Securities and Exchange Commission or SEC form 10-K under the, (inaudible) financial condition and results of operations. And our subsequent reports on SEC form 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 or future events or otherwise.

Before discussing the financials I'd like to talk about our recent expression of concern over the proposed sale of a controlling interest in global crossing to a Hong Kong based company and it’s affiliates, the Hong Kong company as we know as Hutchinson Wong Poa (ph). Also I wanted to express our interest in stepping into the transaction if and only if the deal the blocked. As we have previously stated our intention was and continues to be neither to update the bankruptcy process nor to interfere with the review of the transaction by the committee on foreign investment in the United States also called (inaudible). I personally, and you know my background with regard to national security, I have real national security concerning about this transaction.

I have spoken to people in the administration, I have spoken to people in the bureau at the FBI, I have spoken to people in the CIA, I have spoken to former colleagues of mine and Congress on National Security Committees and they share my concerns. Of some people have said and I think there was a press release that indicated that our interested in global crossing is not credible, nothing could be further from the truth.

Our interest is credible, I've said it before, I'll say it again, we have a billion dollars of cash and marketable securities, we have a great track records of providing telecommunications essential advises to agencies of the United States government, we believe our indication of interest is more than credible and it comes at a time when the process has on its own reached a critical juncture. At this juncture, the significant regulatory approval pending transaction that's not been obtained is by CIFIAS(ph). There's probably other regulatory issues as well. The role (inaudible)in this process is to determine whether our national security risks in the sale of a majority stake in Global Crossing to Hutchinson Telecommunications, which is a company as you know based in Chinese controlled Hong Kong and as well in junction with Singapore Technologies Tele-media.

Before declaring bankruptcy Global Crossing laid a hundred thousand miles of high capacity fiber optic cable under the Atlantic and Pacific Oceans. As a results it controls 15% of the fiber capacity between America and Europe an 23% of the fiber capacity between America and Asia. The (inaudible) is trying to gain the ability tap into the wealth of information carried over global crossing fiber cables if significant ownership of these cables is vested in the company operating on Chinese territory is a real concern. Global crossings customers include the Pentagon, the State Department and other Federal Agencies.

Despite the steps reportedly taken by Hutchinson to minimize its role in operating global crossing we understand that certain members of CIFIAS remain concerned. We share their concerns. In our opinion, given the vital national interest at stake the prudent course would you to ensure that global crossing fiber cables are under American control. With that I would now like to turn to some of our financial results for the quarter. The combined revenue of our telecom and media units for the first quarter was $409m, that's an increase of 15.3% over the second quarter of fiscal '02. EBITDA for these units was almost $26.6m, an improvement of 121% over the second quarter of last year.

Sells of telecom minutes over our network continue their steady growth. This pass quarter we sold a record 4 billion minutes of use and that's a 58% increase over the second quarter of last year. In our core prepaid calling card business, one of our successful new initiatives is our strategic alliance with Walgreen’s Drug stores from which we become the exclusive provider of private label calling cards. Since the launch of the program in December 2002, revenues have been steadily increasing and we are extremely satisfied with our progress. We expect this successful expansion of our profitable calling card business to serve as the building block for IDT's further expansion from its urban sales outlets to national chains that operate in both urban and suburban areas. This expansion will also increase our brand recognition throughout the United States.

Also in the prepaid calling card area we have moved aggressively to increase our presence in Europe by acquiring the global one prepaid calling business from France telecom. This acquisition completed at the end of January increased our European geographical footprint by 40% at the outset. We are continuing to explore other expansion opportunities in Europe and with the intention of nearing our leadership of the US phone card market in Europe. Last December announced that Winstar will be doing business as IDT Solutions. This was intended to the knew era for this business as it becomes further integrated into the IDT network and full line of services.

In early February we launch major marketing campaign to generate awareness of high quality and lower cost alternatives that IDT solutions can provide to businesses. In connection with this campaign, we announced our guarantee of a 10% across-the-board cost saving for business that switch from major carriers to IDT Solutions. In the coming weeks we intend to focus the IDT Solutions marketing campaign on potential customers in 22 markets where IDT solutions operates, through advertising, trade publications, direct mail solicitations, and other targeted methodologies. IDT Solutions I’m happy to report continues to improve its operations.

This quarter EBITDA loss fell to $19m from over $41m EBITDA loss three quarters ago. A $30m EBITDA loss 2 quarters ago and a $22m EBITDA loss one quarter ago. We expect that IDT solution losses will continue their downward trend in the coming quarter. Our growing media business also is making significant strides. Our state of the art animation studio digital productions solution recently announced a number of initiatives in producing a 3D animation both for the educational market and the toy industry. IDT media posted an EBITDA loss for the quarter of $2.44m on revenues to $5.2m, a 52% improvement over last year's quarter. As you know, I'd continues to have over $1b in cash and marketable securities and no long term debt. I would now like to turn the call over to Motti Lichtenstein who will tell you a little bit more about what's going on in IDT Telecom.

Thank you, Jim. Good afternoon. I've always looked forward to the few minutes I am allotted on the conference call to update our investors on the status of IDT Telecom and this quarter is no exception. As I mentioned on the previous call the Global telecom environment remains challenging, however we have worked our way threw these obstacles and delivered another solid quarter. Our minutes of use and revenues continue to grow proving above all there is an increasing demand for our products. Minute of use for the quarter amounted to 4 billion minutes, up 5% from last quarter and a rise of over 50% from the minutes of use in last year's second quarter. The second quarter of fiscal 03, represented our fifth consecutive quarter of higher revenues with quarterly revenues breaking the $400m mark for the first time.

On the other hand our retail revenue (inaudible) continues to decline leading to softer margins. Our overall telecom gross margins declined at 22.3%, from 22.5% last quarter, and a high of 24.2% in the third quarter of fiscal 02. EBITDA amounted to $29m down from $30.3m in the first quarter but a substantial increase over the $17m in EBITDA we recorded in last year's second quarter.

Steve Brown will provide greater detail in our numbers (inaudible). In many ways this is what I call a bridge quarter. While some trends continue from previous quarters, we spent a lot of time preparing ourselves for future quarters, laying the ground work for future growth. For example, we began installation of our fifth US Gateway switch. Installation was completed at the end of February, (inaudible) increasing our US switch capacity by 90 thousand boards or 18%.

In addition, we are adding another 30 thousand ports for our second gate way switch for our project to be completed in the fourth quarter of fiscal 03. These projects will not only allow us increase our minutes of use also give us the flexibility to route our existing minutes more efficiently. Most importantly to me, the recently completed US gate way switch project was completed on time and below our aggressive budget. This is truly a tribute to our engineering and operation staff which manages to keep pace with our (inaudible) minutes growth while helping us keep an eye or our precious return on investment performance.

Going forward I have given both our engineering and operations team and our MIS Staff the clear mandate to push the envelope on technology. We will develop and adopt new switching and routing technologies which will allow us to assemble and manage our (inaudible) in an even more flexible more profitable manner. Let's now take a look at how some of our major business lines performed during the quarter. As I mentioned earlier, our calling card business here in the US witnessed margin declines. Although this is due to a highly competitive place it was mostly by design. During the quarter we introduced new aggressively priced cards. This actually had a greater impact on our gross margin, as even we were surprised how quickly these cards generated significant revenues, while in a short term these new cards have dampening effect on our margins as they quickly accounted for significant portions of our overall business it gives us reason to be optimistic about the future.

The rapid acceptance of these cards indicates to us the market was ready for these and the market share was ours for the taking. Once these are further established in the marketplace we can adjust our pricing to place an add an emphasis on card profitability. This is highly a new concept for us rather it is the model that has guarded our calling card business for several years. The experience of our US calling card business in Q2 was another example of how we are building a bridge to future quarters. We invested in this business in the lower profits and short term in order to capture market share which will deliver larger profits over the long term.

Revenues of our European debit card business were flat this quarter when compared with Q1 in revenues has that business took a breather from its recent strong increase in revenues. Looking ahead we anticipate further growth aided by the continued expansion of our calling card operation in countries outside of our market. The acquisition of the global one prepaid calling business for France telecom which we announced in January will go along way toward expanding our business in Europe. We now have operations in over 10 countries in Europe and we’ll spend the remainder of fiscal ’03 growing both a scale and scope of our operations in each of those countries.

The continued emergence of our European business is a key factor in our plans to become a truly global telecom company. During the quarter 17% of our minutes of use originated outside the US compared to less than 13% one year ago and 11% form the same quarter two years ago. In terms of revenue and even larger percentage 20% came from non US sources. Europe (Inaudible) to expand further relatively young South American operations (inaudible to explosive growth, our plans to establish our presence in Asia, I fully expect that non US business for a growing proportions of our (inaudible) revenues and profits.

Our wholesale carrier business will give another set in our impressive renaissance during Q3. (Inaudible) amounted to $96m up 15% if Q1 and up over 30% over the revenues achieved in 2002 of fiscal 02. This was the highest (Inaudible)since second quarter of fiscal ’01, 2 years ago. Our private label business so small is a major source of pride for us. We launched our much publicized Walgreen’s cards during the quarter and we hope to be able to announce additional deals of this magnitude with major US retails later in fiscal 03. The architect of our private label business, Yona Katz (ph) has recently been promoted to Chief Operating Officer of IDT Telecom. Yona’s impressive skill set and his proven ability to deliver made him a perfect candidate for the position. Looking to the second half of fiscal ‘03 in the third quarter, we anticipate revenues in line with the second quarter with some small margin improvements.

We expect further margin gains in the fourth quarter accompanied by revenue growth if the mid single digits compared to the current quarter with a full fiscal 03 we anticipate EBITDA for telecom in the $120m to $125m range. Going forward our success will be largely dependent upon our ability to grow revenues. This will allow us to track new customers and to generate more revenues from our existing customers. Whether it's the additional of local plans for other services to our consumer long distance customers or the leveraging of our debit card distribution network to advertising or our cards or offer a variety of stored value cards we will not rest until we have covered every potential way to make money in this business.

It has been nearly two years since (inaudible) presented me with the opportunity to lead IDT's Telecom effort. Looking back it has been an exciting time (inaudible) put together a streak of six positive quarters of positive EBITDA, operating profits and ( inaudible) however in order to succeed we must look forward to where we are going not back as where we once were. We face serious challenges during the first half of '03 and read (inaudible) and deliver higher profits to our shareholders. Let me now turn the call over to BRIAN FINKELSTEIN.

Thank you, Motti. Good afternoon, everyone. I first spoke to you about a year ago this month, certainly enthused and excited about the opportunity I was being given, but also with some uncertainty to the challenges that laid ahead of us. As I look back on this first year now I must admit the challenges were greater both in quantity and significance than I expected but so were our accomplishments and successes. We have transformed the company that was in complete operational and financial disarray into an energetic and reliable and efficiently run telecommunications services provider.

Furthermore we have laid the foundation that is required for a company that expects to grow prosperously, profitably in its immediate future. I would like to recap for you a few of the major accomplishments of the last year. We groomed our network by disconnecting over 12 thousand circuits. This lord our cost from about $12m per month to about $5m per month. We rejected and renegotiated thousands of contracts realizing about $1.3m per month savings and rents and another million dollar in savings in contracts that were not rejected.

We reduced non-salesperson by close to 50%, lowering employee compensation costs by about $2.5m a month. We overhauled the entire building process for the company, this entailed merging various building systems, researching and disconnecting over 12 thousand accounts that were being build by old Winstar but no longer customers. We reduced the time that it takes to provision an order by over 30% and are looking to improve that to 60%. We restructured increased and turned over most of the sales organization. We introduced new commission plans.

We created customer retention and lead management groups to help us retain existing customers and acquire new customers. We innovated 12 MAA contracts with the Federal government and we collected over $30m in bad debt that had been accumulated by old Winstar. One of our other focus over the last year to leverage the fact that IDT is our parent. We migrated on to IDT systems platforms where possible. We merged functions such as payroll, purchasing and legal and we gained access to IDT's low cost services. Our biggest step came in this pass quarter when Winstar would be doing business as IDT solutions.

We believe IDT reflects better the company we are today and we want to communicate to our customers they can expect from us innovation, competitive pricing and top ranking customer service. But as I said when I first announced it, this is more than a name change, it's the complete integration of the Winstar technology into the IDT network and full line of services. We will provide a complete solution for any enterprise customers voice and data needs at a substantial savings to the other major US carriers. We are seeing immediate results from this strategic decision.

Although traditional Winstar products are being enthusiastically received they have a prolonged sales cycle. Long distance and VLIP sales on the other hand closed much more rapidly this benefits us in a couple of ways. First obviously revenue is generated more quickly. Secondly, though these products are working extremely well in terms of getting us in the door and then allowing us to up sell the products with longer sales cycles. Another development that has me excited is the advancement we are making in terms of engaging and acquiring large enterprise customers as well as some strategic carriers, whether it is large financial institutions, global media companies, universities and even the US government we made substantial progress over the pass quarter acquiring these types of accounts or furthering their level of interest in our offers.

I have mentioned before a creation of a lead management team. I would I like to update you on the progress being made by that group. This team is charged by generating leads and making sales appointments for our generate business sales. 25 trained agents currently staffed this group and each is generating on average five leads per day. These are qualified leads where an agent secures an appointment over the phone to one of our sales people to then visit in person. This program has become so successful in terms of boosting the productivity of our sales force we are planning on training some agents to actually close sales over the phone.

This would lower our cost of customer acquisition and it is something we will focus on. Before I conclude I would like to provide you with more visibility into some of our metrics.

As I said before it has been difficult for us to discuss this information with certainty in the past because we inherited bad data in terms of true revenue accounts. Our monthly rate revenue is little over $6.5m. a month, this is evenly split between on net and off net, about $2.3m in revenue is usage about $1.6m is MRC associated with our core business essential, products, about $2m in revenue comes from broadband offerings. The remaining revenue comes from cabs and(inaudible), web hosting and a few other small offerings.

We have approximately 12,500 customers about 6,500 are on net and 6,000 off net. Our average revenue per account is $520. Our top five cities are New York, D.C., Chicago, Los Angeles, Dallas account for approximately 45% of our on net revenue. Summing up, a year ago when we embarked on this assignment I told you I was confident we would build a truly great profitable company. I am more certain of that now than I was then. Over the last year I have witnessed firsthand the efforts and dedication that our employees have to this organization. I have seen our value proposition taking hold in the marketplace and I have seen the commitment that IDT has to make IDT solutions a market leading telecommunications provider. I am excitedly looking forward to what we will accomplish in the years ahead. I'd like to turn the call over to Mitch Burg.

I will take the next few minutes. Talk America radio network, continues to experience increases in audience and revenue. We are now up to 5 million listeners per week. We continue to aggressively market our line at the stations for both long form programs as well as short form features. I am proud to share with you that 4 of our long form hosts, Doc Stefans(ph) Schmooly Batair (ph) Bruce Williams, and Barry Farber(ph) were selected by talker's magazine as being the best of their crafts. Our approach to affiliating features has yielded it’s strong ratings for our mort (inaudible) and heavily short forms.

We have other short form programs available to us from our long form host such as Bruce Williams and we are in discussions with several radio groups to clear these features. Our larger audience size along with talk America first time participation and the upfront national radio market has yielded significant increases in advertising revenue, in fact while we are only in our third month of the calendar year talk America is at more than 50% of the revenue that we had in all of calendar year 2002.

We are making strong progress in building out WMET in Washington, D.C. from both a structural as well as talent prospective. Construction is under way, in building WMET out to a 50,000 watt daytime facility. We are also in the process of building a state of the art broadcast facility in downtown Washington DC. We have identified and reached agreements with principal with all the major talents that will populate our airwaves and our weekday schedule as we indicated in our earlier phone calls our programming will be a new type of talk one that is informative, authoritative and entertaining. We will give our listeners the information and prospective that will help them shape their own opinions rather then preaching from a self affirming (inaudible).

We are proud to announce that after we have signed agreements with three prominent journalists who will help us deliver on this mission. Linda Chavez is one of the leading voices in America. From a radio perspective Linda is a strong new voice whose two hour daily show will bring new information and fresh perspective to a younger talk audiences who are underserved by the current talk offerings. We are also proud to announce that Charles Krauthammer(ph) and William crystal. Charles is a Pulitzer Prize winning journalist who will do a one on one interview each week.

William crystal is the editor of the weekly standard (inaudible) here and abroad. His weekly radio show will be the weeks dealing with in the upcoming week. Additionally, Bill Crystal (ph) has agreed to be a guess or our morning show and will provide a daily commentary on the issues that we all need to understand better. We have also reached agreement and principal with two other. And we will have announcements as the contracts are signed.

Progress continues as with our own TV desk top the product. We have conducted operations test and provide broadcast quality TV reception at office desktops that have, high speed connectivity. This will allow us to market the OTB service (inaudible) customers as well as directly to companies who desire to provide their employees with breaking news and financial information. We continued to developed our IDT call center services. This is an area where we are marketing products and services from outside companies to millions of IDT customers, largely Latino in origin on an off hand basis. This business is developing nicely. Year one customers are renewing and expanding their relationships with us, a positive indicator of success, with high reach access to the fastest market segment. Marketers will turn to IDT as a way of building their connections with this important group. Progress at our DTS animation studio was very exciting. This is a segment that offers a break out potential, our offering is a high quality 3D animation as cost comparable to 2D with high speed and proved management control. To date we have signed contracts with TV producers, direct to consumer companies, marketers who use us for promotions, even textbook publishers.

We have developed our own content with an animation entitled, hip hop and Hamilton, a prominent children's marketer has optioned this product for development from us. Our DPS concept in work is well received wherever we show it and the prospects are very bright indeed. We are one of three finalist for an animated prime time series from a leading US studio. We have been asked to provide another studio with an animation test for a Saturday morning series. A third study is discussing direct to consumer as well as series opportunities with us. Additionally we are in discussion with retailers, comic book producers, video game manufactures as well as other children's licensees.

We are signing deals that include (inaudible) and licensing participation in addition to providing animation and we look forward to sharing our progress with you. EPM is our brochure distribution division, division. This division is highly reliant on travel related brochures and we are the dominant company in the east coast of the United States. CTM is a proven financial producer and it has successfully weathered the event of 9/11. We are now in the softer sales months for CTM but fortunately sales have increased during this period over the same period one year ago. We continued to focus on, as well as increasing top line sales. Additionally we continued to explore opportunities to broaden our distribution efforts and to other areas of collateral advertising materials, all using our existing operations platform.

In summary, we are excited about the progress we are making at IDT media, talk American is experiencing strong growth, WMET is building both structurally and a on air programming. OTB desktop TV is ready to enter the market. Our call center is increasing. The DPS animations studio is realizing it’s potential to be a block buster. Our CTM business is strong and getting stronger. It is now my pleasure to introduce Steve Brown, CFO of IDT.

Thank you, Mitch. Actually great report before I talk about the financial results of the quarter, let me briefly talk about how proud we at management are of the development at IDT media. We are aware that the markets really give the zero valuation to our media businesses and the $1m to $3m loss is not exactly pocket change but the development of these businesses over the last year has exceeded our most optimistic expectations and whereas the radio business which we are very optimistic will be huge in the long term, it still will take one to two years before profitability but we expect and are extremely bullish on the breakout opportunities that will put it on the radar screen in the near future. Again, please note, because we often get this question , IDT media is under the leadership of Mitch Burg and a great group of energetic and dynamic managers an no attention is diverted from our core businesses as a great management teams which are understand Motti Lichtenstein. Now the results of the quarter.

By now you should have received the detailed financial statement attached to the press release. Instead of reviewing in detail the financial information which is presented in the press release I'm going to address the highlights of the past quarter especially to the extent how it impacts future operations. Our telecom divisions overall financial performance was relatively unchanged in quarter as expected. For our prepaid calling card business minutes used increased quarter over quarter by a little over 3%, with revenue per minute deceased quarter over quarter by 4%.

This is reflective of somewhat increased competition but it's also a product of placing lower priced cards to gain us entry into new markets. Going forward we do not expect to be as aggressive and expect slight increases in our retail gross margins for the next quarter as marginal increase of cards sold. We expect a bigger pop in revenues from our sales of private label prepaid phone calls especially through the Walgreen’s outlets. These cards started to sell in the middle of this past quarter and has been extremely successful. Gross margins on these cards is significantly lower than those sold in our distribution outlets but because there's relatively little SG&A cost related to these cards we expect higher net margins on these cards.

Also these cards are not used up as quickly as the other cards and we hope to add other deals over the next few quarters. We continues expect 5% to 10% increases in revenues our domestic long distance businesses as we increase the value of our customer base. This strategy will unable us to keep gross margins on these businesses in line at the 55% to 57% level but the cost of a customer acquisition card may marginally increase. Our wholesale division showed a robust improvement of 15% growth in revenues quarter over quarter. We expect a marginal increase in revenues over the next few quarters at a similar gross margins percentage. Regarding Winstar or as it is now called, IDT Solutions, IDT Solutions bottom line continued to improve even as its revenue stream bottomed out.

The real story in IDT solutions in going forward is its ability to attract the enterprise customer to this vein a more extensive marketing campaign was started in February and the initially results have been extremely positive. IDT media as I discussed before is a gem in the making. This quarters loss which is not a true indicator of the division's accomplishments increased as a result of two factors. Firstly, CTM is a seasonal business and the quarter ended January 31st is traditionally the weakest for CTM as well as the division in startup cost for a new business line which was launched this quarter a call center business which we will talk about more in the future.

Net to phone continued to show a bottom line improvement with an improved EBITDA loss even on slightly reduced revenues. Finally corporate SG&A expenses increases approximately $800,000 this quarter and this is due to increased legal expenses mostly due to stepped up litigation on telephonic arbitration and hearings. Of course our balance sheet remains strong with over $1.1b of cash and liquid assets. At this point we would like to open up the call to questions and answers.

At this time I would like to remind everyone if you would like to ask a question, please press star then the number 1 on your telephone key pad. We'll pause for a moment to compile the Q and A roster.

First question comes from Andrew Sidoti from Williams Smith and Company.

Good afternoon, gentlemen. My first question is for Motti and I was just curious if you could comment on what transpired between the first quarter and the second quarter that led to the reduction of your expectations of Telecom EBITDA from $125m to $140m range down to $120m to $125m.

Andrew, looking at the Telecom Sector today we decided that we're going to invest into new markets across the country whether it’s Texas or California, attempt to grow larger market share in New York, New Jersey and Connecticut and we have launched new products into this space which more aggressively priced to date where the long term will grant the company a long term return. So I think the range will be $125m to $130m, but I do believe the company is still on track to reach a powerful EBITDA number and it's a conscious decision to make that investment. And we're realizing greater growth than we anticipated in that space.

Okay. What's happening to the revenue per minute versus cost per minute. I know you in the past have been able to successfully reduce costs fast enough to keep up with declining revenues per minute. I was wondering how that is going?

It's truly a daily challenge to maintain with the current decline in the market cost per minute but as the company is growing 4 billion minutes for this quarter we are maintaining our position in the space and therefore though there is a revenue decline per minute, we need to manage that many more minutes to maintain the same profit level but our belief is we will see growth in this coming quarter.

Okay. I was wondering if you could give a little more detail on the Walgreen’s contract. Just wondering what the initial results were from the rollout in terms of erect new contribution during the quarter.

There's been a minimal contribution during this quarter. The cards were put into the stores December, January. There has been great reception in the store, better than we anticipated, though I can't give more guidance than that due to restrictions I have from Walgreen’s, but we're very satisfied with the existing returns on that contract.

Can you talk about activations during the quarter on the Walgreen’s contract?

There is a -- we don't book the activations, we’re booking the usage. But there has been strong activations throughout the quarter.

These cards are not used up as quickly as the other cards that we used for the Union Tele-card distribution channel. So union Tele-cards can be finished in a week or two weeks from the first activation. These cards go on at a much longer life so even as the cards are sold an activated to record the revenue is going to be a slower period. You're not seeing the full benefit of the sale of these cards.

One more comment with the Walgreen’s arrangements. For the past week you have probably filled the Walgreen’s circular with 55 million copies to the country. We were on page one, the upper left hand corner mentioned 5 times on the front page. So our product is really being pushed through the stores an having great reception.

Great. Thank you. Brian, just a couple of questions. First of all I was wondering… (no audio)

Where did Andrew go? Andrew? (Gap in audio)

In the IDT review date to (inaudible). (Gap in audio)

You're next question comes from Robert Butts(ph) from Greenlights(ph) Capital.

I have about three questions. The first is you expected the Telecom EBITDA to resume sequential growth in the third quarter?

Yes.

Second, you mentioned before that for the former Winstar business that April 30th was going to be sort of a review date. I'm wondering how you anticipate that process playing out at this point.

This Jim Coulter. Let me say we don't have a line in the sand. What we wanted to do is let the executives there and the employees there know that we wanted to see a good trend, you know, sometime in the spring of 2003, and I think we're seeing that. You know, I'm pretty pleased. And it's not even April, you know, so it wasn't that they would have to reach EBITDA a certain line in the sand when it came to EBITDA or operational losses or break even by an April or May deadline it was something that Howard Jonas ph) and I wanted to see real substantive progress being made and we believe at this particular juncture substantive progress is being made, we're very pleased about what's going on over there.

You would anticipate continuing with the business?

What was the question?

You would anticipate continuing with the business?

Oh, absolutely. I'm very bullish about it, always was. It's taking longer then initially thought, one of the reasons is explained in the last conference call we started at a larger deficit than we believed possible. We didn’t get a chance, a lot of due diligence but we're in this ball game it looks like now for the long haul.

Okay. Good. Could you explain what the TV advertising campaign is and what it's targeted at and what it's aiming to achieve and how it's doing against whatever benchmark you (inaudible)?

Brian can supplement my answer. You know, we looked at that carefully, the electronic advertising and after looking at it carefully, monitoring the impact that it had, we concluded that the -- we wanted to do an advertisement that were more targeted and so basically we changed the type of advertisement that we had and were emphasizing more individuals knocking on doors than we are television. Brian do you want to add something to that?

The only thing I wanted to add to that was coincidentally, right around the time we started the beginnings of the advertising campaign is when we started seeing the beginnings of a turn around in the sales effort. And our feeling is like, as Jim said before, that we have for the most part a targeted audience. And it's nice to build awareness build brand recognition through a limited advertising campaign but we feel we can get to where we want to get without a full blown campaign, really focus more on the direct mailings and other ways of reaching the targeted audience in our footprint.

Is the TV done at this point?

For the most part. We are to be tinkling with the mix and maybe some print advertising, some radio advertising, but this is not going to be a full blown advertising blitz, by nay means.

What was the ballpark spend on the TV that you did?

It wasn't very much. I'm guessing, I shouldn't guess on these conference calls, but it wasn't very much.

Your next question come from Tom Freeburg (ph) of Gene (ph) Co-Partners.

Actually Steve Brown, I thought you did a good job of explaining why margins went down on the private label cards. I was satisfied with that. Can you give us a more detailed breakout of why cash marketable securities were down $36m in the quarter? Specifically can you tell us roughly what it cost you to buy out AT&T?

Actually it was no cash expend tours expended on that transaction during the quarter. The actual cash was from operations, not counting -- not taking into account changes in working capital was about $7m that were about $20m worth of capital expenditures. So the difference between the $36m and $27m is basically just a change of working capital.

Okay. Thank you. Jim, can you, without compromising your efforts, can you give us some sort of milestones or remedies that might be available to you as you continue to pursue global crossing?

As you know, I had prepared remarks and I read them because it's an area you have to be very careful in, and basically there is two regulatory issues that I see. One is obviously the committee on foreign investment, called CIFIAS in the United States. It's 11 agencies chaired by secretary of treasury Dan and they chair it and they meet an their discussions are highly confidential, they are private.

And the agencies are just the once you would imagine, the state department, the bureau, FBI, you have DEF Commerce, ambassador trade, et cetera. Once an application is made they within a short period of time will determine whether to make and in depth formal investigation. Just about the time when they were going to rule on that question, and I think it was going to be a ruling that they were going to look at it very, very carefully, this particular transaction, global crossing pulled the application in order to circle the wagon and come back again at another day. So basically IDT and there's other telecommunications companies that have called us you stand ready if and when the Federal government blocks this on national security reasons. There's nothing we can do until that period of time comes. And if they block it and that's where we are today, so I know also that the regulatory period before the federal communications commission was pulled after about 140 days and they have about 184 days, so it was very late in the FCC's review and the FCC stopped the clock.

So everything is stopped right now and we're going to have to find out what CIFIAS really does when they look at this thing from a national security perspective. I personally believe it's a dangerous thing to do. An as you do know, I have a national security background, I was chairman of the base closing commission, I was on the arms service committee for 12 years.

We have very important former defense officials on our boards, I speak to them on a regular basis, I have spoken to a number of members of congress and they are concerned about the national security implications to have our data and voice services of the United States in many instances an certainly our corporations be controlled by a company that is in Hong Kong which itself is controlled by the communist Chinese.

Two other quick points. I thought I heard two different guidance’s for telecom. I thought I heard earlier in the call $120m to $125m for EBITDA and I thought later in the call I heard $125m to $130m. I hate to ask, guys, but which is it?

The answer depends on whether you are optimistic or pessimistic. We can give you a range of $120m to $130m. I would say right about $125m is the number.

That's fine. There were two different numbers given. And can you tell us what you mean by modest increases in minutes? You mean low single digits?

Yes.

Final questions. Were most of the Walgreen’s cards pulled in this quarter of the final month of the quarter if not the final weeks of the quarter. Would it be fair to say that 75% of the Walgreen’s cards were sold in the last week of the quarter ballpark?

Are you talking about revenues which are tied to usage or the activation which are tied to actual sales?

The revenues that might (inaudible) lower gross margin, that might have caused the depressed gross margins although no effect to the SG&A margin in the (inaudible audio). Let me ask you, I need to get and better guidance on that perhaps?

The actual Walgreen’s usage was mostly during the last couple of weeks at the end of the quarter but I want to make sure we're clear. It was not the Walgreen’s cards that resulted in lower overall gross margin. When we referred to new cards these are the cards that are sold to our normal, where I would say our regular calling card channels throughout the country, the regular prepaid calling cards the IDT prepaid calling cards that we issued that had aggressive rates in an attempt to gain market share.

Walgreen’s is still very small and frankly on its own would have been too small to have that much of an impact on gross margin anyway. Those are two separate events that occurred during the quarter

So we were very aggressive in pop plating with let's say lower price cards, yet minutes were -- minute growth slowed. What do you attribute that to?

Minute actually increased by 3%.

I understand. But unfortunately we are looking at the rate of growth as much as we are the absolute growth.

Can't look at that in a vacuum, those two items are two separate issues which is to say that you would have had a different pace of minutes growth entirely if we had not issued these lower rate cards.

Potentially negative?

I don't know if it would have been negative but there's always that potential, sure. Whenever we do, especially in a market like New York, or any of the markets which we have a pretty big share you're going to see something of a cartelization of one cart with the other. So on some level you're going to have a minute on a new card, on the same card a lower priced minute that's in a temporary effect for short term is going to replace a higher revenue minute.

Sure.

It's not all incremental but on a revenue per minute basis it does make a difference. This is a strategy that has been the basis of our calling card business for five years since we started in the business, which is you get the market share and then you start to grow your revenue per minute by raising your rates and the elasticity of demand works in your favor you don't lose as many minutes on the way up on the price, as you pick up the price your revenue goes higher.

Fine. So am I to assume that most of those lower rate cards went into the try state market as opposed to being used as entry points in the new markets?

There's a little bit of both, but again proportionally most of our carts in general are in the try state market

Thank you. That answers the question.

Your next question comes from the line of Todd Rosenblatt (ph) of Standard and Poors (ph).

Good afternoon. A couple of quick questions. On the long distance side can you comment on the pricing environment. I know you guys are one of the cheapest, if not the cheapest plans around. AT&T and some of the others have talked about raising prices that would be a positive I would think for IDT?

Yes. I'm sure you have seen the Wall Street journal recently that rated and reviewed the big three as well as IDT and both price as well as quality and customer service and simplicity of invoice we were rated number 1. In perspective of the overall environment we recently announced a guarantee that anybody that's part of IDT's long distance customer base we will not increase rates through the ends of calendar '03. So we believe that is a major draw to our consumer base. This new offer is coming forward, will be introduced in the local services, probably late second quarter, calendar quarter sometime in July as well as expending service so we anticipate moving forward and growing consumer base.

The local service in any particular market, or is that in all your markets?

We recently got licensed in 10 states so we're pending applications to all the major states, throughout the country.

Using UNP?

Yes. UNP will be the initial solution a long term solution possibly maybe UNIL maybe using IDT Solutions.

Okay. Can you give a little more clarity on which ten states that is or will we wait until we launch?

We'll wait until we launch.

Can you comment on potential share buyback efforts and a lot of cash that's sitting around and if the global crossing deal does not happen?

Especially in today's environment it's a discussion that was basically have a daily or weekly basis. But there's no statement we really would like to make at this time.

Okay. And thirdly you commented before hand about the long distance approval and there being a positive for the international side of things. Can you comment on what's happening in the past quarter as a number of Bell(ph) State's or Bells are received our approval.

We are recently encountering a competitive challenge by the bundle offerings. We do not presently have local service. That is a challenge to our present customer base and we are in the process of having that launched as well as this week we are launching a new service called IDT connect which will give the ability for the family to have a chat service.

Let me clarify that again. There was comments made to us before hand that it would actually be a positive to Bells offering long distance approval in that the international calls would be part of IDT’s business.

I'm sorry, I misunderstood your question. By 271 being granted to the bells that it will create a new revenue stream for our wholesale market by Qwest(ph) and Verizon reason and SBC, et cetera, needing that long distance solution and IDT are presently carrying the tune of 20 billion minutes internationally so we have those available for the we look at that as new revenue stream to our carrier business.

Did any of that hit in the current quarter?

Yes.

Can you quantify that in percentages or something?

It's a small percentage. Between 5% and 8%.

I'm sorry, of total -- of total telecom revenues

Of the wholesale revenues.

Okay. Thank you.

Your next question comes from Chad Rainy (ph) of Addison Clark.

Thank you. A couple of questions. I was looking at calling card revenues were flat sequentially. Is there any concern regarding any sort of cannibalization with some of if new cards? And I have one more question.

The answer is we are focused on growing our base, this large market opportunity across the country, so in one perspective and the more mature markets, yes, we may be can cannibalizing some of our revenues but in the bigger picture in the blended basis we anticipate revenue growth in this business.

Okay. But so you are seeing some of the cannibalization with some of the new card introductions?

The answer is yes but in the long term we will all maintain this market share.

Chad Rainy What is your market share in your markets?

We are a leader in the east coast and we will be a leader in the west coast in the immediate future.

Is that 20%, 30%, how do you -- how do you quantify that?

There's different markets, whether it's Dominican market, Mexican market or Ecuadorian market, so it's a very powerful question you're asking. In the Dominican markets we're very strong, Mexican market we're strong, in Polish we are strong, it's a very powerful question. But large market opportunity is there, but I’m going have Jim Courter give some guidance on this as well.

As lucky points out we look at our markets and we market to these markets on a segment of basis but if you want to get an idea of where we are in the industry in the US for example, in a market that is anywhere from $3b and $5b in revenues per year, we have got a little bit more than a billion. So in the overall market our share is somewhere between 20% and 33%, in specific markets within the New York market, whether it’s California, whether it's Florida, Illinois our share can be in some cases a bit higher than that.

And you still see that increasing?

Again, I do see our overall share. I think the focus here is not to take markets where we have maybe a 50% or so share of the market and go hire, I think we have to focus our energy and that's part of the idea to focus our energy on taking that 20% 33% nationwide market share number and drive that higher.

I guess lastly CAPEX for the year was, what's the guidance. At IDT Telecom. It looks like you did $25m or $30m for the first two quarters

The first half we were at 32. As Motti alluded prepared comments we put just put up our fifth US gate way switch which was a big close to a $10m project probably our biggest project for the year. I would say if you look at the full year you're going to see sort of a front end loaded CAPEX, I would assume another $20m or so. Based on what I know we have signed off on it and it will not be completed until the end of the year. So I would say $50m to $55m for the year.

For the full year. Okay. Thank you.

Your next question comes from Andrew Sidoti from William Smith and Company.

High guys, I have a couple of follow-up questions.

Welcome back, Andrew. What did they do to you?

I don't know. These things happen. I have a couple of follow-ups on IDT Solutions. First, are you still on track for a break even by calendar year ends 2003 and also what the revenue level would be to break even?

First of all, thanks, Andrew, I was beginning to feel a little lonely. A couple of things. We see that month after month we're going to be reducing the burn and we're going to be growing the receive interview. I have absolutely no doubted about that. Having said that, I will also tell you that we're not out there chasing revenue. There are a lot of irresponsible (inaudible) that are showing outrageous pricing in the market and we're not following suit.

Given the state of the economy, given the fact that again you have some desperate telecoms out there that are just will do anything to hold on to market share it becomes somewhat difficult to give you a forecast with a whole lot of precision. But again, if I can tell you, we are going to be reducing the burn on the monthly basis, we're going to be growing revenues on the monthly basis and I think most importantly to have kind of a larger more of a macro view, from IDT's perspective, the amount of cash that's been invested in Winstars and IDT Solutions thus far is $135m and I feel extremely comfortable saying that the total expenditure certainly of cash is going to be less than $200m, probably less than $180m.

You know, the exact time you have it again it is very difficult to predict and I will tell you that you we are resisting the temptation of just running after revenue that just isn't a fit for us. So in terms of the end of the calendar year is the burn going to be down substantially, the answer is an emphatic yes. If the burn is going to be eliminated by the end of the calendar year, I can't tell you with absolutely certainty but that's certainly our goal.

I appreciate that answer. And our last question would be for Mitch. Actually when you anticipate how long before IDT media kind of starts hitting break even?

Right now we're look at 18 months to 2 years out. It depends on talk America is doing very nicely but our investment in WMET and other stations that we get involved with.

Congratulations, Andrew. Mitch has been here for a year and a half and that's the first question he's gotten.

I will take one more question.

Your next question comes from Ted Duncan from Pastor Investment.

Hi. I’m going to ask a couple of questions on Winstar and one general question. How do you do the accounting on Winstar? My logic would tell me that once a communications dollar (inaudible) the old Winstar network and goes on to your existing network that the profits for Winstar would stay with its own network and the profits as it goes on the long distance networks and what have you would stay with telecom. Could you help us a little bit about how you're going to handle that?

We actually 100% sure we understand the question. Basically it's just one Winstar company which is called IDT solutions. It bills its customers on a monthly basis for its telecommunications services provided and as whatever the -- whatever is billed and collected is reported as revenue.

That's fine. That answers the question fine. And I think Andrew in his last question not only asked about the burn rate but I believe he asked about the projected run rate annual revenue that let's call it Solutions would need to reach cash break even. Could you answer that? My memory was it was close to $200m, it was a number you passed out in the past, but I'm not sure.

Our best calculation are to get to a break even we would have to have a run rate of about $15m a month which translates into $180m.

I'm not too far. And the last question which is probably not fair, but as you -- and I thought of it because the guy asked about share buyback which I'm not particularly in favor of, but if you look at the assets that you guys have and take out your cash stock, I'm now talking about the (inaudible) stock between 14 and 15 and if you adjust for economic interest in net to phone I guess about 1250 in cash so we're paying about $2 for all your business, are there, as you look at (inaudible) global crossing other assets? I know you can buy them cheap, but do you see other assets as cheap as you might see your own stop net of cash?

We have a very large and innate team it is a great time to have cash. There are great opportunities out there. I mean, Winstar gets all the attention. We bought a whole bunch of small, when I say small, just a million dollar or less in the million dollar range acquisitions that other companies paid 10s of million dollar of dollars for so we are constantly looking at these opportunities.

The only one you got to see in the paper, global crossing, WorldCom, which we were serious about, you know, before the -- at the time they went bankrupt Winstar intelligence. There are numerous opportunities we are evaluating all of them. Sometimes they are attractive because the assets of the company are worth more than the actual price would have to pay for it. And we will announce them as they come out. We don't preannounce our strategies.

I didn't mean that, but at least from my perspective your stock has become so inexpensive that looking at these depressed assets are not nearly as much a slam dunk as they might have been if your stock were higher. You have answered the question. Thank you very much. That's it for me.

Let's have one other person, another caller

Your next caller comes from Tom Sweet(ph) from (inaudible)Partner.

One comment I would like to make to Brian. My model doesn't have you going break even until 2007, so maybe I'm being more lacks than Jim or Howard. So hopefully you can get the time.

Is that a question?

I no, that's a statement. Anybody thought that Winstar was going to break even by the end of this fiscal year. One last question. What was the nature, if it wasn't cash, what was the nature of the compensation granted to AT&T for the remaining net to phone.

I'm not sure we're permitted to disclose…

We may not.

(Inaudible) other purchase service to AT&T so they can maybe restricted to disclose the nature of a future filing on that?

It will be a disclosure on that as the event actually closes.

Okay.

Certainly you'll see disclosure on it by the time we file 10-K.

One last comment. I'm not very much into making guarantees, but one guarantee I will make that we will be profitable before 2005. On that last call, that transaction is over with AT&T.

Right. No, I understand. I was just wondering when we might get some disclosures to the nature of the compensation, Jim. That's all.

As you know, we are not going to wait until the year 2007.

I know. That was the point of my statement

Thank you, everybody. Have a great evening.

Thank you for participating in today's conference call. You may now disconnect.