IDT Corp (IDT) 2003 Q3 法說會逐字稿

Good afternoon. My name is Katie and I will be your conference facilitator today. At this time I would like to welcome everyone to the IDT Corporation quarter 3, 2003 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remark there will be a question and answer period. If you'd 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 on your telephone keypad. Thank you. Mr. Courter, you may begin your conference.

Good afternoon. I would like to welcome all of you to IDT's earnings call for the quarter ended April 30, 2003. This was an exciting quarter at IDT and I'll brief you on some of the highlights. After my remarks you'll hear, of course, from Morris Lichtenstein, the CEO of IDT Telecom, Brian Finkelstein, CEO of IDT Solutions, then Mitch Burg, who heads up IDT Media. Finally, you'll hear from our Chief Financial Officer, Steve Brown.

Before we begin, I would like to discuss the forward looking statements that may be made during the course of our conference call today. During the presentations by executives and in 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, and similar expressions. These statements constitute what we call 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 differ materially from the results expressed or implied by these statements due to numerous factors. Some of these factors are described in our most recent annual report on SEC form 10-K under the heading management's discussions and analysis of financial condition and results of operations, and in our subsequent reports on SEC 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.

At various points in our discussion today we will be referring to EBITDA, and other measures that are not defined by GAAP. The corresponding GAAP measures and the reconciliation of EBITDA to those measures is contained in our earnings release for the third quarter which can be found on our web site under the investor relations heading.

During the quarter we increasingly focused on positioning our Media division for future growth while continuing to grow and to improve IDT Telecom. Digital Production Solutions, one of the promising companies in our Media division, is building a solid base of content and relationships to exploit its state of the art proprietary technology. We intend to grow DPS into one of the corner stones of our Media assets. The projects and transactions I will discuss are examples of how we are acquiring an impressive liber of intellectual property, while increasing DPS's presence in the production of animated features and broadcast quality productions.

One exciting development was DPS's acquisition of the rights to two never-before seen projects by Gene Rodenberry (ph). These projects will be the first time Mr. Rodenberry’s vision will be viewed using 3D animation to bring his creative genius to life. DPS capabilities will transform the projects in ways not previously envisioned. We want to take a new generation of young people on journeys through space with realistic scenery and special effects that would make Mr. Rodenberry indeed very proud.

On May 15th DPS acquired a controlling interest in Film Roman, Inc. Film Roman produces the Simpsons, King of the Hill, along with X Men and other productions. Film Roman has received 18 Emmy’s and combined with DPS's technology will now move from 2 dimension to 3 dimension in its productions.

[inaudible] well for our Media division in the future we are pleased to announce that Liberty Media, one the world's leading media companies, has purchased a 5% stake in IDT Media for $25m. The investment follows previous investments by Liberty Media and IDT and certain of its other divisions. IDT media posted an EBITDA loss for the quarter of $1.6m on revenues of $5.5m, a 67% improvement over last year's third quarter.

Moving to IDT Telecom, we recently made a decision to cease formal discussions regarding the acquisition of a significant interest in ITXE Corporation. ITXE Corporation is an internet telephony company. We had previously identified ITXC as a potential candidate for strategic investment. On the basis of discussions with ITXC's management we determine that a tender offer with or without their support was the best way to proceed and during the quarter we commenced plans to make the offer directly to ITXC's shareholders. Following announcement of the offer we entered into a standstill agreement with ITXC and engaged in discussions regarding a friendly transaction. On May 20th we announced that we had terminated our formal discussions with ITXC and the standstill agreement has since expired. At this time we have discontinued our efforts regarding a transaction involving ITXC.

Global Crossing. As I discussed on our last earnings call, our interest in Global Crossing was initially a reaction to the transactions implications for U.S. national security. Since that time the FCC, that's the Federal Communications Commission, has rejected a request for expedited review of the transaction and there appears to be renewed interest by other telecommunications companies in Global Crossings besides IDT. We continue to believe that some or all of the Global Crossing assets would provide a good fit with our existing telecom operations and that we, at IDT, are the best suited to operate the Global Crossing businesses in a reliable and profitable manner. Further, we have the resources and experience to acquire the business and to turn it around. Accordingly, we remain strongly interested in a transaction if it can be accomplished in a structure and at a price that is reasonable; furthermore, we believe that STT, that's Singapore Technology TeleMedia, would be a good partner and that management are honorable people. We cannot predict, however, where this will lead us or what the outcome may be.

Further, with respect to IDT Telecom, we're pleased to announce that IDT has been named the exclusive supplier of prepaid long distance calling cards to Barnes & Noble college bookstores, the leading operator of college and university bookstores in the country. The quality and brand identity of Barnes & Noble, as well as the nearly 500 on-campus retail outlets, are just some of the attractive features of this new relationship. This announcement is a continuation of a program of partnering with leading household names, such as Walgreen’s and others.

We also saw exceptionally strong growth in our Wholesale Carry division in both revenues and profits and margins as we begin to reap the benefits of expanding our interconnections with foreign telecommunications operators.

At our IDT solutions subsidiary we continue our focus on cost cutting and bottom up analysis of our operations. We have instituted a program that will rationalize our operations on a city-by-city, building by building basis so as to deploy the proper level and type of assets at each location to economically serve our current and future customers. We anticipate that these efforts will further cut our connectivity and maintenance costs. Additionally, we are focusing on our sales incentive programs in order to increase sales where we are already operating. We are confident that these efforts will reduce our cost structure and significantly reduce the monthly burn rate at IDT Solutions by the end of the year.

Our efforts to date have resulted in a slight increase in revenue in the third quarter as compared to the second quarter and a division operated at a gross profit in the third quarter in both cases for the first time since we acquired these operations from Winstar (ph). We anticipate a continuation of this trend of sequential quarterly improvements in revenue as time goes by. By combining this top line growth with our stepped up cost cutting efforts, we can expect to see substantial bottom line improvement in the quarters to come. This quarter IDT Solutions EBITDA loss fell to about $16m from $41m EBITDA loss in the third quarter of last year, an exceptional 61% improvement.

We now turn to non-operational financial matters. As Steve Brown will discuss in more detail in a few moments, during the quarter we recorded a one-time non-cash compensation charge of $13.7m related to our exchange of outstanding stock options to purchase shares of our common stock for options to purchase an equal number of our class B common stock. As our class B common stock is now our most widely held and traded class of stock, we felt that it was appropriate for our employees and other option holders to be receiving that class of stock on exercise of options. Under accounting conventions, a new measurement date for the options was triggered resulting in a charge to the extent of the difference in the exercise price of the options and the fair market value of the underlying stock on the new deemed measurement date. You should know that there was no change in the total number of options outstanding or their exercise price in connection with the exchange. Despite this even swap of value, the accounting convention does not allow for the recording of a corresponding $13.7m benefit received for extinguishing the common stock options.

Before we get into the presentations by our division heads and our CFO, I would like to mention a few more developments. On April 7th we announce they'd we had moved ahead from 968th place to 806th place in the Fortune 1,000. This dramatic jump in one year moves us past some household names and in the midst of many leading U.S. companies. On April 3rd Jack Kemp (ph), former Secretary of Housing and Urban Development and a member of Congress, in fact, during the time I was there, joined the IDT Corporation Board. Secretary Kemp adds another strong outside voice to our Board, one with integrity, insight and vast experience. He joins a distinguished group of leading figures from the public and business sectors to provide diverse and independent guidance to IDT.

On March 11th we announced that former governor Pete Wilson (ph) of California and Merv Adelson (ph), founder Lorimar TelePictures (ph), joined the IDT Media Board and former governor James Gilmore (ph) of Virginia joined the IDT Solutions Board. We continue to add leading figures to our subsidiary Boards that bring a wealth of experience to guide and assist those companies in their substantial growth.

Finally, IDT continues to have over $1b in cash and marketable securities and no long-term debt. I would like now to turn the call over to Morris Lichtenstein the CEO of IDT Telecom who will talk more about that unit.

Thank you, Jim. Good afternoon, everyone. In many ways the third quarter was about getting back on track, although we were still confronted by many of the same challenges which we have faced throughout the fiscal year our operations improved for the most part in each month during the quarter. On the last conference call I said that IDT Telecom would get back on its profit growth track in Q3 and in fact we did. We reported EBITDA of over $31mfor the quarter which compares to $29m in Q2 and $25.5m in last year’s third quarter. Once again, our growth started with increased minutes of use. Minutes of use for the quarter amounted to 4.3b minutes, up 9% from last quarter and nearly 50% higher than the last year's third quarter.

The third quarter of fiscal '03 also represented our 7th consecutive quarter of higher revenues with total Telecom revenues up only slightly from Q2 but 112% higher than during the third quarter of last year. Gross margins improved by 40 basis points over the second quarter levels to 22.7%. We believe that there is more room for improvement in our gross margins and expect gross margins to be in the mid 23% area for the next couple of quarters. In fact, [inaudible] of overall Telecom revenues in Q3. Excluding the effect of the shift in revenue mix, our gross margin improvement would have doubled to 80 basis points. With EBITDA of over $90m for the fiscal year to date we have now generated more EBITDA in the first three quarters of fiscal '03 than we did for the entire fiscal '02. Steve Brown will provide greater detail on our numbers in his discussion to follow.

Although our results of fiscal '03 to date are impressive on their own I think that in some ways they mask the actual progress we have made this year. Throughout the year we have made significant investments in the future growth of our business. For example, early in the third quarter we completed installation of our fifth U.S. Gateway switch. This effectively increased our U.S. switch capacity by 90,000 ports or 18%. In addition, we are currently adding another 30,000 ports to our second [inaudible] Gateway switch in a project to be competed by the end of this month.

Our [inaudible] expansion involved more than simply making additions to our capacity. In a declining revenue per minute environment it has become very important for us to lower our permanent costs of network infrastructure, ultimately, we will accomplish this through the adoption of new technology such as [inaudible] switching capabilities which we are currently rolling out in certain parts of our network, in general, we must be relentless in our efforts to derive greater and greater efficiency out of our network.

Our investments in our business include not only the capital expenditures we have made but also the additions we have made to our human capital. Throughout the year we have added to head count across many divisions and functions. In addition to beefing up our existing lines of business, we have added people in our attempt to add new business lines while expanding our operations globally. Since the beginning of fiscal '03 about ten months ago we have added offices in several countries including Hong Kong, South Africa and the Philippines. By establishing a presence in these and other countries, we will enhance our ability to both terminate minutes into those countries as well as to originate both wholesale and retail minutes in those areas. Generating a larger proportion of our business in foreign markets is a cornerstone of our growth strategy.

As I mentioned on the previous call, a percentage of our total minutes that originate outside the U.S. continues to rise. For the third quarter 18% of our minutes originated out of the U.S. as compared to 17% in the second quarter and less than 15% in the third quarter last year. In the fourth quarter this number should approach 20%. Looking ahead, I envision a time when as much as 50% of our total minutes space originates outside the of U.S. This won't happen overnight but we are planning to get there.

In addition to our IDT Europe subsidiary, our international expansion centers on our Russian Telecom subsidiary Korbena (ph) and our South American division. Korbena is currently generating about $2.5m per month in revenue and over $500,000 per month in EBITDA. We expect Korbena to remain one of our fastest growing divisions in fiscal `04 as well as we see plenty of opportunities for expansion within the exciting Russian telecom market.

Although it is currently a small division in terms of generating minutes and revenues IDT South America is extremely important to our long-term growth plans. We have made significant capital investments in Argentina and Peru and coupled with our knowledge of that market we now have the tools to succeed in that region on a large scale. Let's now take a look at how some of our major business lines performed during the quarter.

Our US calling card business, a significant proportion of minutes and revenues continue to come from new aggressively priced cards which continue to have a dampening effect on margins. However, throughout the quarter several of the recently launched cards entered the higher margin, more profitable stages of their life cycle resulting in higher overall calling card margin in the U.S. Profits for our U.S. calling card business increased in each month throughout the third quarter. This was in mark contrast to the second quarter where our calling card profits declined throughout the quarter; therefore, I can say that we exited the quarter with a great deal of momentum in our largest business.

We continue to expand our European calling card business into new markets and are now offering cards in 12 countries. We are therefore putting in place the pieces necessary to accomplish our stated goal of deriving at least 50% of our European calling card revenues outside our flag ship UK market. In the third quarter, less than 60% of our total calling card revenue came from sales in the UK. This compares to 70% in the same quarter in fiscal '02.

This geographic diversification has become increasingly important to us. During the quarter we faced intense price competition in our more mature markets such as the UK and Spain. By building a business which features a robust mix of operating markets we will inflate ourselves from the effects of price competition in any one or two markets. In general, as we face declining per minute price realizations for our calling card businesses on both sides of the Atlantic, we plan to offer a broad range of enhanced services on our cards which can help mitigate the decline in revenue per minute. By offering other services on our cards, both telecom related and non-telecom related, we can take a product that is often viewed as a commodity item and turn it into a source of value added services to our customers.

Of course, the current [inaudible] IDT Telecom show is our wholesale division. Global carrier revenues amounted to $109m, up from last quarter, and an increase of close to 40% over the revenues achieved in Q3 of fiscal '02. This was the highest quarterly carrier revenue since the first quarter of fiscal `01, ten quarters ago. Since bottoming out in the first quarter of fiscal `02 our wholesale revenues have increased by 60%. The performance of our wholesale business is particularly satisfying for us. Even as this business went through a sometimes painful right sizing we abided by our belief that there would always be a market for wholesale minutes termination. We have been rewarded that belief even as others have fled the wholesale marketplace over the past few years. Not only has this business survived, it has thrived and we believe that wholesale presents us with an opportunity to grow even further.

Our consumer long distance division continues to deliver solid profits but it has run into its share of competitive challenges as many of the industry's largest companies have rushed into this market in recent months. Going forward we will develop a bundle of local and long distance offerings as well as services targeting international callers as we continue to carve out our niche in this marketplace.

In our Private Label (ph) division we continue to add names to our portfolio of customers. In the coming months we hope to announce additional deals with large national retailers.

To sum up, we continue to face challenges in Q3. We have fought through them to deliver yet another strong quarter. We also continue to invest in our business to help ensure that even greater things lay ahead for us in fiscal '04 and beyond.

On a separate note, I'd like to announce that we have elevated Jonathon Levy, currently the President of Wholesale Carrier to the position of Vice-Chairman to the Board of IDT Telecom. Jonathon is responsible for the [inaudible] renewal of our wholesale carrier business, which I detailed earlier. It is my belief that his courage and passion will assist IDT Telecom in its endeavors for years to come. His promotion to the level of Vice-Chairman is well deserved.

I'd like to end my comments today with a brief story. Last month I attended a global telecommunications meeting to GTM in Washington, DC. For those of you who are unfamiliar with GTM, it is an annual industry event which is attended by representatives of over 500 companies from 160 countries. In short, it is our industry’s must attend event. The 2003 GTM was not the first one I have attended. At the conference IDT Telecom was represented by many individuals who had attended this event for years. However, this year we all noted something different. IDT Telecom had become the recognized name in the industry. Whereas in the years past we had to scramble to convince companies to meet with us, this year companies were seeking us out. Industry's largest companies [inaudible]. It was a clear indication of our continually rising status within the Global Telecom industry. During the industry's darkest days we have posted impressive growth and profits and the industry has taken notice. In the coming quarters we plan to add to our legend as we take more steps down the road toward becoming a global telecom powerhouse. I look forward to sharing the details of our progress with you in the future. Let me now turn the call over to Brian Finkelstein.

Thank you. Most of us are familiar with the adage good things come to those who wait. I believe good things come to those who work hard as well. We have been working extremely hard at Winstar and so we are realizing the benefits. The third quarter was a watershed quarter for us, for the first time since IDT purchased Winstar revenue grew quarter over quarter. In addition gross margins turned positive also a first. There's more. We continued to substantially improve our bottom line, earnings before interest, tax, depreciation and amortization improved by 17% from a loss of $19.4m lat quarter to a loss of $16m this quarter. This vested our quarter over quarter improvement of 12% recorded last quarter. I should also mention that this quarter's numbers included a $1.2m marketing expense related to our IDT solutions advertising campaign. Excluding this charge EBITDA improved by 23%.

I am confident we will continue to build on the success because we did much more than just improve our financial metrics this past quarter. We completed a thorough review of the entire company. Due to substantial improvements in our reporting capabilities and as a result of the cleanup of data and records that we have been undertaking for the last 15 months, we now have much better visibility into the company's operational metrics. This will allow us to make better informed decisions as we drive the business going forward. We now know our run rate revenue at the building hub and city level. We know the cost of capacity and the excess capacity available at the building hub switch and city level. We now measure sales at the salesperson building, city and regional level.

Armed with this information, we are now able to do things like focus the marketing and sales organizations to sell into buildings that have existing excess capacity thus lowering our acquisition costs. We know which building sites can be redirected to different hubs allowing us to us reduce real estate and capacity costs further. Access to all this information has allowed to us formulate a plan that I am confident will reduce our cash burn to approximately $2.5m per month by the end of the calendar year. We will end the year with a much more efficient network, both capacity and building-wise. We will have a much more accountable sales force and we will have a much more productive work force.

We also focused our efforts on new product offerings that will leverage our low-cost fixed wireless network. To this end we introduced just this last week All for One, an offering that bundles unlimited local and domestic long distance for $29.99 plus line charges in New York, DC, Baltimore and Boston. This is extremely competitive in relation to Verizon's comparable offer of $38. In non-Verizon markets, we're offering $44.99 including line Charges, again this compares quite favorably with MCI’s $59.99 for the same service. Actually I'm comfortable saying we will provide better service, not the same. I am obviously very confident that at our price point we expect to do very well this summer and will continue to grow revenues from here.

Further bolstering my confidence in our future revenue numbers is the quality of salespeople and sales executives we have been able to recruit from some of our top competitors over the past few months. Our major sales channel, which targets medium and large sized businesses now numbers 14 individuals and in the month of May this group had it’s best month of production to date. Our strategic sales channel is up to 9 individuals who continue to perform a very difficult task for us which is to carry our name and our service into the biggest commercial enterprises in the country.

The government channel has grown its sales and program office substantially and has recently gained approval from the Joint Interoperability Test Command, the JITC, to interconnect with certain Department of Defense Networks to support priority Department of Defense calling. Think about that for a minute. In these turbulent times this is clearly another indication of Winstar's high quality network and significant endorsement of our ability to service the most demanding of commercial enterprises and government agencies.

The general services administration, the GSA, has recently approved Winstar as a vendor for domestic and international long distance and calling card services growing substantially the value of services that Winstar can now bid on with the government.

In concluding, it has been a very good quarter for us. We continue to take huge strides toward profitability as indicated by the bottom line results that we posted. But much more exciting to me was all the work, all the research, all the planning that took place during the quarter because it positioned the company so that it will operate more efficiently, work more productivity, and compete more effectively going forward.

I would just like to remind everything that our satisfaction with the past quarter in no way blinds me or the rest of the organization in terms of what remains to be done. We continue with the sole focus and determination of bringing this company to profitability. Although I believe good things come to those that work hard, I believe even more that great things come to those that work hard and smart. We are on our way to great things. Thank you. I'd like to turn the call over to Mitch Burg.

Thank you, Brian. IDT Media was founded in April 2002. And we've had a very exciting initial 12 months. As we started our life as IDT Media, it is important to note that the businesses that are part of this division were in their infancy, and I would like to take the next few moments to talk about their growth and where we are going.

We are very excited about our progress at Digital Production Solutions, our global animation studio. At DPS we have invented the new paradigm in animation, one that produces high quality animation both 2D and 3D at low cost with improved speed and management control. It is the paradigm that the entertainment industry aspires to and it should come as no surprise that we have received an enthusiastic reception to our innovative approach.

As I speak with you today just one year after we started actively marketing DPS we are involved in the production of 3 full length features, 4 television series and numerous direct to consumer promotional video products. Our business model includes original content, as well as ventures that include fees and equity. One of our original content features is Starpoint Academy. This feature is based upon a virgin Gene Rodenberry concept and we are in the process of script development, computer modeling, and producing a trailer that will be used for meetings with distributors this fall.

Additional feature work projects are in the pipeline and we expect to have an announcement on several more co-production projects over the next few weeks.

DPS announced our purchase of a majority stake in Film Roman in May. With this modest investment we joined forces with the people who are producing the most successful prime time series in television history, The Simpsons. The cover story of the May 26th issue of Media Week magazine says it is all. "The Simpsons is still going strong” and we at IDT are proud to be a part of their success moving forward. Film Roman also does production work on Fox’s King of the Hill, the WB’s XMen and Sci-Fi channel’s Tripping the Rift. When we combine this with DPS’s existing work on Monster by Mistake seen on five international networks and work that we are doing on two pilots, DPS is now an established player whose involvement is now sought by the leaders in the entertainment industry.

Progress continues to be made in our radio unit. Talk America revenues continue to grow, and our calendar year 2003 revenues now exceed revenues for all of calendar year 2002. Fueling this growth is the combination of important, highly rated programming that is being sold by professional sales organizations. We are pleased with our progress with Mort Crim (ph), who does several daily features for us. Our relationship with Mort is now a year old and together we have built a combined daily rating that is greater than a 1. This is a very strong rating for a syndicated radio entity, and we believe and our acting to make Mort an important voice across America.

Future growth will come from increased affiliation as well as new programming that that we put on the air. Our new programming includes a daily program hosted by Jeff Metcalf (ph). Original weekend programs such as the Movie Show and Talkers Countdown, Encore weekend programs, and a new feature entitled Travel Corner. The Travel Corner feature is off to a fast start with more than 1mlisteners and over 400 stations. We have a terrific radio staff in place and are proud that Trey Quinn (ph), Talk America's COO, has been selected by Radio Inc. magazine as one of the 25 most influential [inaudible]. Trey is the leader of Talk America' revitalization and His recognition is very well deserved.

Having great leadership is an important element of building success and we have added two talented radio professionals to our radio management team. Jim Weiskoff (ph) joined IDT Media as President of our owned and operated station. Jim is the former head of Clear Channels AM Washington DC cluster of stations and he is a proven talk radio executive. Jim is overseeing IDT media's local radio effort including the build out and launch of our Washington DC station, scheduled to be completed the fourth quarter, as well as heading the search for additional radio signals in large and mid-size markets.

To ensure that our programming is a great listen, we recently hired Bob Dane (ph) as our local programming director. Bob is a knowledgeable talk radio enthusiast and he comes to us with previous experience at Westwood, Metro, as well as being an independent programming executive. OTV is IDT Media’s office, desktop, TV application. This is a product that has been in development and recently emerged from successful operations tests. We believe that OTV will be an important part of the emerging wave of office software, offering executives real time video news feeds that will allow them to make the best informed decisions. The recent war demonstrated that there is a clear need for this product and OTV’s benefits of best information, affordable pricing, limited band width requirements with no incremental hardware costs should position us for successful introduction into the marketplace.

TTM is ITT media's brochure distribution unit and we are the dominant company in the eastern United States. TTM has always been a profitable unit but as a travel related company we were negatively impacted by the events of 9/11. Acquisitions of other brochure distribution companies softened the initial impact of the economic downturn in travel and an aggressive and talented staff has worked to broaden our distribution outlets, increase top line income to over $15m and significantly improve EBITDA by more than $1m. As we move forward, we will look to build upon this very successful year by continuing to broaden our distribution, diversify our offerings, and look to improve operations efficiencies. As I began my remarks, I stated that it has been a very encouraging and a productive initial 12 months at IDT media. We are experiencing significant and successful developments at all units and there are additional initiatives in the pipeline.

Our approach to media is a little different than the other media companies as we are new, innovative, technologically advanced without the impediments of existing infrastructure or conglomerate life. We are fortunate to have a hard working, talented staff that is focused on building success and even more fortunate to have the support and involvement of the IDT management team and our profit is real good, maybe even great. Others are great. I'm proud to announce that Liberty Media has made a $25m investment in IDT media's vision. Liberty's purchase of a 5.6% stake in IDT Media is in itself an affirmation that we have something special developing in our division, and our team will continue to strive to deliver important new communications platforms that will connect with consumers. It is now my pleasure to introduce Steve Brown, CFO of IDT Corporation.

Thanks, Mitch. Well, I would like to start off by saying we here at management are really excited with what's going on here at IDT, at all levels. We're excited with Q3's financial performance even though we hope to do better, and we are optimistic that we will continue to improve. We're excited in the direction that telecom Winstar IDT Solutions, Net2Phonw, and especially Media are going. We are excited to announce our first consolidated EBITDA positive quarter in years and if you would leave out the meaningless non-cash compensation charge which I will discuss later and Winstar and Net2Phone this quarter we would have had positive EBITDA of over $8m, and even without the net gain on investment and other income we would have reported net income of over $6m this quarter.

We are excited about telecom's performance achieving our goals of increasing gross margins quarter over quarter and both the retail level and the wholesale level with retail gross margins improving 90 basis points to 26.5% in Q3 and wholesale gross margins improving 50 basis points to 12.2%. Whereas we knew that concentrating on gross margins would have negative impact on retail revenue growth, and retail revenues did shrink 3% in Q3 but the net effect is that telecom EBITDA improved 50 basis points to 7.7% of overall telecom revenues or $31.5mand net income from operations improved 30 basis points to 3.8% of revenues or $15.7m. Included in these numbers wholesale revenues jumped 14% and accordingly record telecom revenues were achieved with a 1% growth from last quarter.

We are also excited at our accomplishments at the IDT Solutions/Winstar level. As mentioned earlier, IDT solutions finally achieved a positive gross margin and is now confident that gross revenues going forward will be on an upswing. Its negative EBITDA improved by 172 basis points to a loss of $16.1m and its net loss from operations improved 153 basis points to $19.6m.

We are also excited, and how can you not be, at the achievements of IDT Media this past quarter. In much of the coverage of our company people often state that you cannot give any value to IDT Media's businesses because IDT has a history of shutting them down. Well, I am declaring now that these businesses are here to stay, and if you don't believe me, then believe the $25m Liberty Media investment for 5. 6% of these businesses. By the by, do the math, an upset. And because the financial performance this past quarter does not accurately reflect what is going on in this division, I feel the need to once again reflect on this activity.

IDT Media's global animation studios known as Digital Production Solutions or DPS, as mentioned before by Jim and by Mitch, purchased a controlling interest in Film Roman in May which means going forward Film Roman's financial performance will be included in IDT Media. Film Roman is coming off their first net income positive quarter, and DPS is also entered into numerous other deals that we have announced and have found that we hope to announce in the near future. DPS is dealing at the highest level with high profile executives at all levels because we can do the highest quality 3D animation at extremely low cost and because it is backed by a parent who has a billion dollars in the bank. The global animation studio is also very scalable and has access to over 2000 small animation studios throughout the world. These studios can be managed over our protocol here in Newark. We therefore can handle a multitude of projects, in-house and are currently evaluating literally dozens of opportunities.

Radio and OTV have also taken major leaps this past quarter, and we hope to continue to announce major developments in these two businesses in the near future and CTM as always is as steady as a rock. For the quarter ended revenues remained fairly constant at $5.5m, negative EBITDA and loss from operations improved to $1.7m and $2.3m respectively. Net2Phone continued to improve slightly to a negative EBITDA of $3.1m and a loss from operations of $9.7m. But, of course, the big story Net2Phone is the continued development of its cable telephony businesses.

Last but not least, even with the continued developments of our now new businesses our balance sheet continues to be among the strongest in our industry and our cash and marketable investment continues to be in excess of $1b.

Finally, as I discussed before, let me acknowledge our expense to income from operations called non-cash compensation of $16.6m. $2.7m is attributed to Net2Phone’s options repricing which has been ongoing. The remaining $13.9m is substantially all due to the the results of taking existing options to purchase common shares listed as IDTC and converting them to options to purchase the last class B shares listed as IDT. Seeing that both classes of stock are trading fairly close to each other and the only difference to the shared is the vote and the options are being converted to the lower vote, which is all meaningless any way because Howard Jones has voting control over IDT, there is no cost to the shareholders and, as a matter of fact, additional value is being given to the shareholders. Nevertheless due to the rigid accounting laws regarding changing any terms of an option even if there is no financial gain or loss we are incurring an expense this quarter for the difference of the option price to save market value over the vesting the period, and being that these options on the average are old and almost all vested, we had a non-cash compensation expense this quarter totaling $13.9m. At this point we would now like to open up the conference call for questions and answers.

At this time I would like to remind everyone if you'd like to ask a question, 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 Tom Friedberg with Janco.

Hi. I think this question is probably better directed at Steven and Morris than anybody else. It seems that, you know, one of the things, positive things that came out of this quarter was that margins on the wholesale business continue to improve, and can you give us an idea and clearly, you know, revenues did as well, is this simply because of better utilization of the network or are margins actually improving overall in the industry? And, you know, can you give us a flavor for what sort of traffic is running over your network? And then the second question, which would probably be better directed at Mitch or Jim, would be can you help us understand how -- and we did do the math, Steve, how a valuation of 20 times Media's trailing revenues or thereabouts was derived as the correct price or valuation for that segment of the business? Thanks.

First, let me just add we have Norm Rosenberg here. Norm is the CFO of IDT Telecom, so he will be addressing some of these answers, also. And we'll have Bill Pereira (ph), from Winstar joining us also for Winstar questions.

Let me try to answer your first question. Tom, the reason we've seen nice revenue growth in our carrier business as well as profit growth in the carrier business is for multiple reasons. Number one is we're focusing on revenue permits; thereby, increasing more profit per minute. Additionally, we have grown out our [inaudible] relationship throughout the world, reducing our termination costs and that reduces our cost and increases our profit. But more importantly, we have increased our minutes per quarter dramatically, and looking back at last quarter to this quarter we have approximately 200m minutes for the quarter obviously resulting in bottom line effect. Looking forward, we feel pretty confident after the GTM conference and talking to our customers that we are viewed as a tier 1 supplier of international minutes and we look forward to see growth as well in this business.

Tom, the other part of his question was do you see this trend as an industry-wide? I don't see it. I think it's the fact that we're just doing a better job.

Looking from the perspective of the industry, there is a decline in revenue per minute making it that much more challenging as well as players in space are financially distressed and therefore it's less of a circle to supply so I believe that's that much more challenging industry and I do agree with you. I do believe we are focusing and approaching it from a smart angle and there bye maximizing our network and maximizing our relationships and therefore we are successful.

Morris and Norm, would it be fair to say that your incremental gross margin on the incremental dollars or minutes that you're providing is north of 80% or is it almost 100?

No, Tom, I don't really look at the model that way. This is not -- this is not like a Winstar business, for example, where you have a certain base and then upon which you build minutes that come in as you would point out 80% or 100% incremental margin. We sort of look at the bucket as if we're starting from scratch every quarter, so, you know, every minute comes in and it could be either higher or lower than what our previous minutes are but instead we focus not on gross margin per se rather than on profit per minute, and we looked at not only the minutes we're bringing in incrementally but even on our previous minutes is there a way we can put through a price increase, there a way that we can make sure that highest revenue and therefore highest profit minute go over. So it's not really a matter of looking at every minute we do every quarter.

Well, I guess the bigger question and the broader one is help us understand the derivation of value. I come up with something close to the implied value of what Liberty has put on IDT Media, something like $450mor well over $5.00 a share. That's what my math tells me. Can you give us some better idea of how we got there?

We -- you know, internally, we think the potential for Media is enormous. Again, it's very, very special business. I think what we have developed with the global animation studio, I think, you know, I'm just saying it's speculative but I think we can be bigger than Pixar. Pixar does a film once every 18 months. We can do multiple films in a year plus television projects plus other projects. I think we have something extremely unusual. The market does not know about it yet, but, you know, the people in the industry, based on what we've done and what we've announced and the product we've done think very highly of us, and I think you'll be hearing a lot more from the -- what's going on with the animation studio. Again, that's just one aspect, but that's the one aspect that has the potential for the faster return and the higher return. On the radio side, that is a very ambitious project. The return will take a much longer period of time, but it's, I think we're also creating something that -- I think that what's driving it is the potential upside to get in on the global animation studio at a very early stage.

I've got another question but let me drop and I'll circle back to you. Thanks.

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

Congratulations on a good quarter. In the long distance business how long would it take to deploy your Uni T products and also I was wondering how will the Uni T offering affect margins within the long-distance business?

Okay. We are presently licensed in New York and New Jersey to offer local as well as applications across the country to have animation on a or more importantly a bundled offering, we are in the process of launching this summer so it's in the soft mode, the test mode and it will be ready in the next few months.

How will that offering affect your margins in the long distance business?

I'll handle that part of it. There's a couple things to look at as far as how Uni T more specifically gives you the ability to offer a local product would enhance our margins. On the surface, you know, at first glance it would add to our -- it would add to our revenue per customer which is always a positive thing. In terms of the margin it really depends on which level we price it. The interesting thing about being able to offer local service and bundled services when we look at our models even if we were technically not to make a single dollar per customer off the top from a local service offering, there is still an economic benefit to us in terms of having a lower churn which has been shown to happen when you have a better bundle, better job of collections, and today it's become obvious in the industry that you have to often it to keep your customers. You have different prices in first place so it will be a state by state thing but there are benefits that go beyond whatever incremental margin expansion we see.

Do you expect to lose money when you officially roll out your offers?

I would not. No, I think at a minimum we want to make sure we're not losing any money would it but I think there will be some incremental gains on a per customer basis.

And how long do you think you will get the long distance business back on path? In a quarter or two?

I would project in approximately two quarter feedback on a growth track not only due to a local launch. We have a number of other initiatives that we're in the process of launching, primarily international calling plans as well as additional features, functionality such as chat services, family chat for our customer base as well as totally new offering plan which I think will revolutionize or disrupt the pricing throughout the industry, and we anticipate launching that as well in the next quarter.

Thanks. And I just want to follow up on prepaid side. How is the rollout going in the new state that you're -- that you have been targeting like Florida, Texas and California? Are you running into head winds? I guess what I'm trying to get at, I know that the ethnic calling card business has not grown really in the past couple of quarters. I'm just wondering what kind of head winds you're running into as you try to expand that business.

We are focusing in California and Texas and we're being very aggressive in both those markets. In the California in the last quarter sales were up 36% over the previous quarter with penetration to California as well as Texas, activation are seriously up, so we're pretty satisfied with the growth in those two states.

Okay. And another question, Brian, and Winstar, you were targeting $2.5m burn by the end of calendar 2003, and just was wondering how much, how much burn, cash burn is left to break even in that business do you think?

We anticipate a maximum of $50m but we are hoping that it's going to be a lot closer to $40m.

Okay. And just wondering if there are any major Winstar contracts that are coming up soon for renewal.

For renewal or new contracts?

for renewal. Any major contracts that are coming up for renewal.

Again, do you mean for renewals that are existing Winstar customers?

Yes.

Or potentially new customers?

For existing customers.

I mean, there is nothing in particular. What I'm very excited about is there are a number of large contractors that are up for renewal with competitors that I think we stand a very good chance of gaining ground with those customers over the next few months.

Okay.

Andrew, I know where you're coming from, and basically the way we've answered the question is that the existing customers that we have seem to be satisfied. Those contracts, many of them, are not up yet. Those that are, we don't believe that those contracts are in jeopardy. So it's new stuff, and, you know, the sky's the limit. I think Brian is doing a remarkable job, and within a few months we'll all know that.

If I could just elaborate one thing that Jim said not on the remarkable job part of it but on the metrics, understand that when we walked away from so much of the old revenue of Winstar it was precisely because there were large chunks of revenue that were very poor revenue where the margins were basically non-existent and strategically it just wasn’t a fit for us. Right now when you look at your customer base of the roughly 14,000 customers that we have, most of the growth has been with the small and mid-sized customers and it's not like we're relying on very large chunk of revenue from any large customers going back to the old Winstar days. Where we've been adding in terms of the large accounts are brand new contracts where we're typically signing this many up for one two three years. So there is virtually no risk of any large hit coming, you know, that we would have to deal with in the near term but like I said, the good news is I think we have a tremendous opportunity over the next few months to take advantage of some contracts that are coming due with some of our largest competitors.

Thank you.

Your next question comes from Michael Longo (ph) with West Broadway Partners.

Hi, guys. First thing, with respect to the media valuation, is there anything that I'm missing with respect to Liberty’s investment? There are any options or warrants or anything or is it just a straight 5.6% equity stake for $25m cash.

It's a straight equity put, no warrants, no options.

Okay. So is it fair to say that I guess it's less speculation on the valuation and more affirmation, I guess the way we were looking at it is if a third party comes in and takes 5.6% stake and gives you $25m cash, it seems like a good trade to us, so I guess we saw it more as an affirmation than a speculation on the valuation.

I agree. And it's not that we were desperate for an investment so we had the opportunity to, you know, pick and choose. We wanted -- we're not going to give a big chunk of the upside of this company away, but I think we're extremely enthusiastic about what's going on, and we're glad to -- that somebody else does, also.

Second question on the announcement that you intend to lease capacity on the I guess Winstar based on a recent FCC ruling, can you talk about what potential you see from that from a capacity perspective? Do you see a lot of Winstar excess capacity being used under those leasing agreements? And if so, what kind of margins do you expect to get under leasing agreement as compared to existing Winstar contracts?

Sure. You know, number 1 let me just be very clear in terms of what the FCC announcement, what it means for us. Basically, what it's going to enable -- the FCC in essence is going to be promoting the leasing of spectrum and it's going to be setting guidelines, it's going to be setting specific time frames to basically make that market a lot more liquid. Any time you have a market that is much more liquid the holders of assets in that market place, and certainly we're the largest holder of fixed wire in the market place it will be a lot easier for us to lease that from spectrum. Our spectrum covers all 50 states, and we view the opportunity to spectrum especially through certain verticals like through the wireless carriers to be tremendous. The margins would be through the roof because basically we've got in other bankruptcy. It's not having something we're spending a whole lot of money to try to keep up so we are very excited about the liquidity entering the marketplace, and I think there are going to be a lot of opportunities in the market place to make use of these assets.

Thank you.

Once again, I would like to remind everyone if you'd like to ask a question, press star, then the number 1 on your telephone keypad. Your next question comes from Peter Isel (ph) with Snider Capital Management.

Yes, good afternoon. I was wondering I hope you can help me out in the quarter how much of a run rate, a monthly run rate, how much revenues were new revenues that you created versus revenues that you acquired?

That's a good question, Peter. After we basically finished our cleanup if I had to guess how much of the old revenue we were left with, and again it's not something that I could quantify because we don't really -- we don't differentiate between old Winstar revenue and new Winstar revenue but I would say the old Winstar revenue was probably under $6m at a point after all the completion of the entire cleanup. It may have been close to $5m. Right now we're at a run rate where our revenue excluding taxes is about $7m a little north of $7m and I can also tell you that based on sales that are actually signed, sealed and delivered in just a waiting provisioning and billing, there is a substantial amount that's sitting, waiting in the pipeline that, you know, I have every reason to think that you'll be very pleased when we report those numbers this coming quarter based on sales that are sitting in the pipeline, we certainly look forward to continued growth quarter over quarter.

Let me just jump in. You've explained to me many times that there is a huge delay, you know, in getting the revenue. I mean, the lead time is huge in this business, and you might want to just talk about that for a second.

Sure. Depending on literally the day of the month that a contract is signed, then it has to go through various approval processes. We have a very tight credit process. Until it finally goes through provision and then finally to billing, again depending where it is in the cycle it could certainly take some I'm time. A few months. On the other hand I'm very proud to note our churn has been extremely low. By industry standards I can't imagine that we're not the lowest, we don't have the lowest churn rate out there. As soon as we get -- as soon as a customer discontinues service, we immediately take it out of revenue. So in fact when you look at the time lag, it works to our disadvantage, but we think it's a much cleaner way of reporting it.

Okay. And then getting to this $2.5m per month cash burn rate by the end of the year, how much will be achieved through revenue growth versus cost reduction?

Roughly 50/50.

One last question for Morris on the consumer long distance side. How is that bundled offering testing going? What's been the -- what's been the results of it?

We presently have approximately 200 customers on local service, and we are satisfied with the service we're providing to our customers and we believe we'll be launching in the immediate future to the general public.

Okay. Great. Thanks.

Your next question comes from Peter Dural (ph) Account Management LLC.

Hi. My question relates to the global animation studio. There was an article about a week ago about that industry worldwide. The impact of that theme to be, I don't know if you saw that, Mitch, but that seems to be pricing pressure and movement of the locations to India, primarily. I think from the Philippines if I read it right. Did you see that article?

The first thing I'd like to say, Peter, is you have always been a believer of IDT Media so we appreciate your support.

I think the article you're referring to is actually in the Times.

Okay. Those are the two papers I read, and I confused them.

Right. There has always been a lot of production that's done overseas, especially in Asia. The issue become for the studios there is this great deal of excitement in doing production in Asia, and the story is the guy that's very excited, he's going to Asia, the next week he gets there. The third week he tours, the fourth week he's want to come home. There are two issues. The one is you're getting a better price but secondly you're losing the quality and you're losing management control because people are out of touch and thousands of miles away the difference in our approach in our global protocol is that we're able to take advantage of the lowest cost provider for the type of service that that we need but more importantly because we have a proprietary, I hate to say this because it's a lot of Ps. Proprietary patent pending protocol it allows us to see the work the animator the doing in real time so we can make corrections on the fly which saves a lot of money for the producers. This type of advantage translates to lower price, better management control, much more speed, and frankly as we've gone through Hollywood and gone through New York, everybody loves this approach and people have asked to license this property from us so we're very excited about what we're doing.

Okay. Good. Thanks very much. Can I just for future reference I'll will come back to that, in the today, but, you know, when I come down and see you?

Hope to spend time with you.

Thanks very much.

Your next question comes from Michael Malarkey (ph) with Marchdant (ph).

Yes. Thank you. I'm looking at the insider purchases and sales, and to be candid, I'm confused as to there's a lot of option exercised and in subsequent sale of the stock, and it seems inconsistent with the opportunities that you're really advancing on and doing a nice job with, and I was wondering if you could help me out because, you know, I look at operationally what's going on and I'm impressed and I'm just trying to figure out why, you know, why so many people were exercising options and in selling every last share that has been exercised to the option program.

Yes. Scientifically, Mike, this is Jim Courter, you'd probably have to ask all the 144 filers why they've done that which they did in the past but I have I a pretty good idea, and it's something that, in that, Steve Brown and I talked about it today, and it's something that is under active consideration, maybe we should set some internal rules to this, and I don't want to go further than that but you probably, you know, understand what I'm referring to. Basically, number 1, it is -- it occurs and it manifests itself in the sale and the exercise of options and the sale of the stock because people don't make a great deal of money around here. You know, my salary is the highest in the company, and now granted because of the success of telecom, I've been able to get some bonuses which have helped, but my salary is $250,000, and there's a few others making that and everybody else far less. So it's a way of supplementing their income. I think that is one of the reasons. The second part of the reason is that it's a young company with lots of medical bills, with families that are growing, and, you know, when you're in your 30s and 40s you need a lot of money because you're sending kids to private school, et cetera, et cetera, so it's, I think part of it is the fact that there are a lot of people here with large families, and we love that, you know, it's a very family oriented place but they need a lot of money to support the families, and No. 2 it supplements your income, which if you look at the income of people that are competitive of our it's far less so it's a combination of those two things.

port you're in your 30s and 's of an optiononmodeling,*and I notice that you actually purchased some shares in non-open market transaction and did not sell. Can you just give me the exercise price on your acquisition of $72,500?

I don't have -- I don't think I did. I booked --

May 2, 2003, James A. Courter, Vice-Chairman.

No. I think what that was, it was the conversion of my common shares into B shares.

Okay.

So that, you know, reflected in the if you purchase but it wasn't. The last time I actually purchased, because I had the whole lot of options, and I still have shares from long before the company went public, I did buy I think 50,000 shares. That must be going back about five years. I haven't made really an acquisition since then. I mean, a large percentage of my net worth is wrapped up in this company, and --

That's the way we want to see it.

You love it and I do, too, because I believe in this company. I think I'm doing the smart thing by over the years exercising and selling so little. But on the other hand, my children are educated. I have a relatively small family. And I made a lot of money when I retired from Congress before I came to IDT so my financial profile is different than many people in the company.

Okay. Thanks so much.

You have a follow-up question from Tom Friedberg with Janco.

Guys, in terms of gross margins on the calling card business, you know, gross margins were great overall at telecom, but is 22.5% to 23% sustainable at say $260m a quarter or is it sustainable at a high higher revenue level, i.e., are we going to start seeing resumed growth in the calling card business again sometime soon?

We believe we can sustain this margin level and increase revenues will come from [inaudible] our share in new markets such as the West Coast, Texas and California, so the answer to both your questions is yes. We anticipate revenue growth as well as maintaining the margin, the gross margin percentage of 22% to 23%.

How far along are you in either finding a supplemental partner or working with Union Telecard more diligently to get into, say, markets in the American southwest? Because it really seems like you've done a great job in the tri state area but that Union Telecard's reach may not be as extensive in some of the other Hispanic markets in the U.S. and you've always been strong in the Hispanic markets.

UTA has serious focus, dedicated staff in most of those states as well as taking new office space in those markets, and we anticipate large growth in that part of the country in the next couple of months.

We'll be looking forward to that. By the way, Brian, I wanted to congratulate you seeing gross margin growth at Winstar was really important to. I think that should give everybody a lot of faith that things are really turned in the right direction there.

Thanks, Tom. I appreciate it.

I'm a big believer of positive gross margins.

I bet you are.

At this time there are no further questions. Are there any closing remarks?

Not really. Thank you very much. I think it was a very solid quarter, and we look forward to another solid quarter coming up. Thank you for joining the call. Have a good day.

This concludes today' IDT corporation quarter three 2003 earnings conference call. You may now disconnect.