IDT Corp (IDT) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to IDT Corporation's First Quarter Results Conference Call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for questions following the presentation.

I would now like to turn the floor over to your host, Jim Courter, CEO and Vice Chairman. Mr. Courter, the floor is yours.

Good morning. I'd like to welcome you all to our fiscal year 2004 First Quarter Earnings Conference Call. This of course is for the quarter which ended October 31, 2003.

We are altering the format of our conference calls to reflect the suggestions that we've received from many of you in the investment community. We have executives from all of our divisions at hand to answer your questions in the Q&A session which will follow.

The prepared remarks will be made by myself and our CFO, Steve Brown. This we believe, will shorten the overall time of our presentation and allow more time for your direct questions and I'd think that you'd appreciate that.

Additionally, we've included statements of operations, cash flows and balance sheets with the earnings release. This to is in response to your request. It should relieve you from having to pull out figures imbedded within our prepared remarks and will also allow me to connect these numbers to larger trends in our various businesses.

As always, before we begin, I must caution all those listening today about any forward-looking statements that you may hear during the course of the conference call.

During both the prepared remarks and the question and answer period that follows, we may make forward-looking statements either general or specific in nature. These statements are subject to risks and uncertainties that may cause actual results to differ materially from results that we anticipate. These risks and uncertainties include, but are not limited to, general economic conditions in the global telecommunications markets, the general condition of the economy in the United States and internationally, the disruption of our facilities and operations due to a variety of causes including terrorism, war, acts of God, any of the specific risks and uncertainties discussed in our Annual Report on Form 10-K covering the period ended July 31, 2003 and any other factors that affect the business in which we're involved.

We assume no obligation to update any forward-looking statements that we've made or may make, or to update you about the factors that may cause actual results to differ from those that are forecast.

One more important item. In this presentation, we may present certain Non-GAPP financial measures. A reconciliation of these non-GAPP financial measures to the most directly comparable GAPP measures can be found on the Investor Relations page of our Web site at www.idt.net/ir by clicking on the word, "financials". Again, that is www.idt.net/ir and then click on the word, "financials."

One of the most frequently asked questions that we receive from the investment community is, what will be the next Net2Phone?

I understand the question, but I disagree frankly with the implications of the question. Our strength at IDT lie not only in the incubation and sale of new businesses and technologies, but in strong and adept operational ability in our mature businesses.

Once again, I'm delighted to announce another quarter of record breaking revenues. Our revenues increased more than 5 percent over the previous quarter to a total of over $513 million.

Our gross profits have increased as well to a total of over $119 million. This increase was driven by another strong quarter for IDT Telecom, which grew both wholesale and retail revenues significantly and whose total revenues increased yet again to $455 million.

Perhaps more impressive, during this quarter, Telecom's income from operations increased over 11 percent to $22.3 million. This marks the ninth consecutive quarter of both sequentially increasing revenues and positive operating income.

IDT is not just about the big play. There is operational expertise here that cannot be denied. Our wholesale business has grown 7 percent over the previous quarter and we've maintained our profit margins thanks to our management strength.

We have continued to find ways to increase our debt card revenues in an extremely aggressive market, thanks once again to our management strength. We have re-energized our consumer service division with our American Unlimited Flat Rate Bundled Service currently growing at the rate of 8,000 new customers every week, thanks again to the strength of our management team.

As our European operations continue to expand and our early stage businesses in South America and Asia take route, we continue to take strides to our goals of being a true global telecommunications powerhouse.

In IDT Entertainment, revenue jumped to $12.1 million. You will see significant increases in IDT Entertainment revenue with the completion of our Anchor Bay acquisition. This acquisition, like our acquisitions of Film Roman and Mainframe, will be immediately accretes.

Anchor Bay is a video and DVD distribution company with approximately 3,500 license and own titles and $80 million in annual revenue. Combine this revenue with revenue from Film Roman, Digital Production Solutions and our Mainframe acquisition and you will understand why in fiscal 2004, we expect IDT Entertainment to be profitable with $100 million in revenue.

From a mile high perspective, here's what our entertainment portfolio now includes. We possess technology that affords us the ability to simultaneously produce multiple projects at a cost far below that of anyone else in the industry. We have entree into the theatrical direct to DVD and broadcast media for both two-dimensional and 3-D animation. We will have a proprietary distribution output to our creative products for those of you who have asked the big question, we at IDT believe that IDT Entertainment will be our next homerun.

Performance at our IDT Solutions, which you know is called Winstar Division, continues to improve. Gross profit increased by 117 percent to $3.0 million this quarter with a gross margin jump from 6.7 percent to 13.9 percent. This marks the seventh consecutive quarter of gross margin improvement at IDT solutions. This improved performance impacted the bottom line as well, with operating losses declining from $13.1 million last quarter to $12.1 million in the current quarter.

We here at IDT are committed to move this division over the goal line as well. Please note, that first quarter results include a $4.2 million restructuring charge. This will fund a restructuring plant to further reduce operating losses through the removal of approximately 600 unprofitable buildings from a network together with their associated activity and further workforce reduction. Overall costs reductions have allowed IDT Solutions to introduce more aggressive pricing selectively marketed services off-network and will allow us to achieve the burn reduction goals that we have set.

In November, our media division launched its new radio format named, "Liberty Broadcasting." This intelligent, passionate radio mix includes the début of both Linda Chavez and William Kristol. Linda Chavez to our daily show has already begun to build its station base and win over audiences. Only two weeks from its air date, William Kristol's insightful daily feature already appears on over 170 stations nationwide hitting five of the ten top radio markets.

Also, media's CPM Brochure Display business has returned once again to all time highs and top lines sales with most of the increase hitting the bottom line as well.

The results of our internet telephony components were reported at length in Nexus owns quarterly conference call yesterday. However, I would like to note that we are currently in negotiations to extend the LLC arrangement giving IDT voting control over Net2Phone. We expect therefore to continue to consolidate Net2Phone for the foreseeable future.

I would also note that as announced in November, IDT won a $21 million arbitration award against Telephonica International. This has led to many questions about our other significant pending lawsuit against . While we believe our claim against are more powerful than those we made against Telephonica, it is simply too early and too speculative to guess at any possible settlement or award amounts.

When I look back at this quarter's results, I see a well-run company with increasing core business profitability in our Telecom division and a secondary revenue component in entertainment that is really beginning to take off.

Looking at the achievements of the current quarter, we believe that you can see all the necessary elements for continued and indeed heightened success in the future.

I'm now pleased to turn the call over to our Chief Financial Officer, Steve Brown. Steve.

Thanks Jim. Another landmark quarter. A quarter in which our annualize revenue run rate exceeded $2 billion. Another quarter of improved Telecom revenues and improved net income from Telecom operations.

This is also a quarter in which IDT Entertainment burst forth ready to explode into our second largest revenue producing subsidiary and also a profitable subsidiary. We also believe IDT Entertainment has unlimited potential and finally this quarter, our subsidiary Net2Phone has come out of the shadows to become once again the darling of the investment community because of its entrée into the cable telephony markets.

Let me now go through the financial highlights by segments. As always, I will compare quarter to quarter which is Q1 '04, this quarter versus Q4 '03, the last quarter.

Regarding the Telecom segments, Retail Telecommunications revenues increased $11 million or 3.5 percent this quarter to $329.4 million. All of this is due to the growth in our domestic card business, mostly due to organic growth in our cards distributed through Union Telecard and also the growth in our private label and private branded business.

Our consumer phone service business revenues actually marginally decreased this quarter as additional customers added this quarter for our bundled local and long distance service products were insufficient the churn of existing long distance only customers. But remember, the bundled services only were offered during the quarter.

We expect the tide to turn this quarter however, due to the increased demands and marketing of our bundled products and for having the bundled products for a whole quarter and we also anticipate a steady continued increase in our debit card revenues over the next couple of quarters.

Wholesale revenues continue robust growth with a 7.1 percent increase to $125.6 million this quarter. We continue to expect growth quarter-to-quarter for the next few quarters, but not at the same rates of increase as indicated by the past few quarters.

Regarding gross margins, wholesale gross margins remain stable with a 10 basis increase to 11 percent this quarter.

Retail gross margins decreased 60 basis points to 26 percent this quarter. This is due to a 310 basis point increase to 52.2 percent in our consumer phone service gross margins. And again, this is due to the addition of the bundled service customers who generate lower gross margins than our long distance only customers who generate higher gross margins.

Our debit card gross margins remain unchanged at 22.7 percent. Please note, that our debit card margins remain constant even though our permitted decrease into increased competition because the proportionate cost of revenue permitted also decreased.

Going forward, we anticipate overall gross margins of retail Telecom accounts to be subject to the mix in revenues as debit card gross margins should remain relatively constant over the next couple of quarters and start increasing marginally by Q-4 and consumer phone service gross margins should continue to decrease as bundled service customers become a higher percentage of its revenue base.

The most interesting part of our Telecom segment is that in order grow revenues for the declining revenue per minute, we obviously generated exponentially more minutes and to do such, normally would entail significantly larger SG&A costs, but because of careful management an budgetary controls, SG&A costs for Telecom remain flat in dollar terms and as a percentage of revenues, actually decreased quarter-to-quarter by 60 basis points from 14.2 percent of Telecom revenues to 13.6 percent of Telecom revenues.

Depreciation costs also remained relatively the same and as a result of this performance, we not only recorded record Telecom revenues this quarter of $455 million, but we also recorded adjusted EBITDA of $37.7 million, a 5 percent increase from last quarter and a record income from operations of $22.3 million an 11.4 percent increase from last quarter.

Regarding Winstar, our Winstar division continued its low margin of improved loss from operations on flat revenue improved those margins to 13.9 percent. Adjusted negative EBITDA of $12.1 million and an improved loss of operations of $20.1 million.

We continue to see the light at the end of the tunnel of Winstar and we still hope for the home run which may come from increased government contracts and/or leasing our spectrum.

Our entertainment division now has burst forth as a full fledged operation with this quarter revenues of $12.1 million and a loss of operations of only $706,000. But the story lies not in these results as reported this quarter, but how through acquisitions and internal growth, this division starting January 1st will be at a base of expected annual revenue run rates of $150 million and profitable with adjusted EBITDA estimated to be no less than 13 percent of revenues. Remember, this is just the base.

There is significant upside, which will occur for the production and distribution of home owned and jointly directive consumer high-quality animated productions, as well as ancillary revenue sources from these products through licensing and merchandising, as well as our potential home runs which are two internally developed and produced 3-D featured films.

Revenues from direct and consumer products should start in Q-4 and ramp up from there and the timing of revenues from theatrical releases is harder to give guidance at this time and will not come into play until the earliest of fiscal '05.

As far as the rest of IDT segments, Medias revenues decreased $970,000 to $5.8 million, adjusted EBITDA of media improved to a loss of $740,000 and net loss from operations improved to $1.3 million.

Net2phone revenues remained relatively flat at $21.3 million, adjusted EBTDA loss improved at $3.1 million and net loss from operations improved to $7.6 million. For more information on that Net2phone as always, please refer to their separate earning release.

IDT Corp., expenses included a charge for non-cash compensation resulting from our new strategy to combine restricted stock grants with options as incentives to key employees. This resulted this quarter in a non-cash compensation charge of $1.7 million, otherwise corporate SG&A costs decreased marginally to $8.9 million this quarter, thus our adjusted EBITDA loss was $8.9 million and a loss from operations of $11 million.

Other financial information, our diluted rated average shares were approximately $83 million. Our cash and liquid assets which we're not talking about continues to be in excess of $1.0 billion.

Also please note, not included this quarter, but which will show up in Q-2, will be the $21 million gain on settlements from the Telephonica lawsuit.

For further insights, we ask you to refer to our press release that we issued today and for the forthcoming MD&A section of our 10-Q, which will be filed no later than Monday the 15th.

At this point, I would like to open the call for questions.

Thank you. This line is now open for questions. If you do have a question, you may press the number one followed by four on your touch-tone telephone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that before you pose your question, please pickup your handset to provide optimum sound quality. Once again, that is one followed by four on your touch-tone telephone at this time. One moment while I poll for questions. Your first question is coming from Peter of . Please go ahead with your question.

Good morning gentlemen. Can you just comment a little on the phone card competition. Do you see competition in terms of the existing phone card companies, or are they actually new players in the market, they're squeezing margins here?

This is Jim Courter. I'm going to have Norm Rosenberg answer that question. But before, just let me tell you who the executives are that are on the call.

Steve Brown you know our CFO already spoke. Brian Finkelstein, the CEO at Solutions. Bill Pereira, CFO of Solutions this year. Norm Rosenberg, CFO of Telecom. Jerrold Rapaport, who you know as the head of IR for IDT. Morris Berger, CEO of IDT Entertainment is on the call. Mitch Berg, CEO of Media. Sam Abraham, CFO IDT Entertainment and, Marcelo Fischer our Controller is here as well.

So Norm why don't you take a step.

OK, Peter as to your question as far as the types of competition that we're seeing in the phone card business. The first thing that I've got to say is no matter what the market is, whether it's in a more established northeast U.S. market store or in the markets that we have in Europe or in developing new markets in the west and southwest in the U.S. there is competition. So the competition unfortunately for what it is, is alive and well. As far as who's providing it, it really varies by markets. For the most part, there's no one competitor that is particularly meddlesome to us.

In all our different markets, we compete with some groups and in the New York market we compete with other groups and on the west coast. For the most part, the profile of these competitors is somewhat similar. However, you're talking about a company that's relatively small that is usually willing to come into the business, lose a little bit of money upfront in the hopes perhaps of making money eventually and we look at each competitor on a case by case basis.

Some of them we need to take seriously because we're familiar with them. We're familiar with their ability to sustain losses and have some staying power in the marketplace and others are frankly, we don't really view seriously, because there's no way they could possibly be making money and they're here today and gone tomorrow.

The other issue there is that it depends on the marketplace. In a place like New York or New Jersey where we're pretty well established, we will deal with the competition in one way where our focus will be to pretty much try to maintain our market share to the extent that it can remain profitable, whereas in some newer markets, we have to be the aggressor and we become the hunter as opposed to the hunted.

Can you talk about you're doing in the markets such as -- I believe you were talking about the US -- a few calls ago about getting to Dallas and some other states and can you just talk about Europe and how's our business there?

Sure. As far as -- let's start with the U.S. Obviously, I think a couple of states that have come up most often on these calls have been California and Texas. California due to the sheer size and obviously demographics that we like in Texas as well.

We'll probably compared to plan, we're at least on -- probably ahead of plan in terms of where we are in Texas. We've seen some very strong growth in Texas. Texas is becoming a larger and larger piece of the overall puzzle. Probably our fifth or sixth largest state. We were very happy for what we've seen in Texas.

In California, we're probably at or maybe slightly behind where I frankly would have liked to have been by now, but I'm very optimistic given the steps that we've taken. What we've done in those couple of states in California for example, we've taken our number one sales person who has actually physically moved out to California and bought a house there and picked up and moved out there.

We've opened up an office in the Los Angeles area to be followed shortly thereafter by something in Northern California, say in the San Francisco area. So the sales there are growing and I think that we're going to see some real growth in calendar '04.

Texas continues to be a nice market for us. We took another one of our top sales people and we said, you know go ahead and go to Texas and we've done a nice job of that as I think I alluded to in the -- we alluded to in the press release, the next step to that will be to sort of fill in some of the blanks in the southwest so we can look for some states like Arizona, New Mexico, Nevada, Utah and Colorado, to sort of fill in the blanks in the southwest because we think that those markets also have some favorable demographics for us.

Getting to Europe. Europe has been a matter of two different types of markets and the more mature markets where we've got a pretty descent foot hold like the U.K and Spain. You can see we've faced some decent competition and obviously there it's a battle to maintain our market share and then they're other countries like Scandinavian countries. Places like Italy and France, Belgium and the other countries within western Europe where we're trying to grow our market share.

Our revenues in Europe have been flat to slightly higher. If you go back a couple of quarters and I think really we've tried to focus on expanding in a controlled and profitable fashion and that's why you haven't seen an enormous increase in the revenues. Your kind of digesting the gain we made over the last fiscal year.

Are you disappointed in Europe?

You know, I believe this one when revenues don't grow, but in terms of the plan , such as it is, Europe is in line with the plan. When I talk about digesting growth, I think if you look year-over-year, if you look at '02 and '03, I think that calling card revenues in Europe were up by something on the order of 48-49 percent.

So that's a significant increase and the way we have always done this market is that you have your growth stages and then you have what I would call your digestion -- you know clean out your indigestion, but your digestion in profit enhancing stages. So I think Europe is fine. We look at it on a country by country basis. We're very involved obviously in what they do.

A couple of our executives and CEO is actually out in Europe as we speak and then obviously we had top of all priority list. So you know we're fine with that and let people see some nice numbers going ahead.

If I can. Norm's absolutely right. There's a sow and time to harvest and you're harvesting in the United States. You're harvesting in the U.K. You're mostly harvesting the rest of Europe, but also we're sowing in Latin America with calling cards. We launched - I just came back from Hong Kong. We have an office there we launched this week. First, two prepaid calling cards in Asia and it's a card that works from Hong Kong into China and Hong Kong to the Philippines so there's other growth opportunities in different parts of the world.

The media side is incredible. You guys have done an unbelievable job there. Can you just tell me about some of the big players and you are a big player also now its seems and you know on the media side. But, have the big players been on base with you guys?

Hi this is Morris Berger. Basically, we've been to all the big players and they're embracing as their paradigm for production is selling and they need assistance in the technology, as well as the financing of the futures as well as their . So it's been a great run for us.

You've done a great job. Thanks guys.

Thank you

Thank you. Your next question is coming from Andrew with Williams Smith & Company. Please pose your question.

Yes, a couple of questions here. First, on your entertainment division. The $150 million revenue growth that you have and a -- I was wondering first of all if you might be able to break that revenue contribution by business, such as Anchor Bay, Mainframe, Film Roman, you know sort of in the ball park range?

Hi Andrew it's Steve.

: Hello, Steve.

You know we're figuring Anchor Bay on video distribution is a base of about $80 million and to grow from there. Film Roman has a base already of $40 million and we hope that's going to grow. The - Mainframe has a base of about $25 million in revenue a year and it's going to grow and the remaining is the internal DPS Production.

Again, as I said on my remarks, this is base and this is continuing revenue and as we have new products entering the market, it's just going to grow. The base will keep on growing in a snowball like fashion and as each new production is rolled out, there will be ancillary revenues continuing from year-to-year as we keep on adding new productions, it's just going to grow and grow and grow, so -- but the $150 million is basically is the basis I described.

: And the 13 percent EBITDA margin that you mentioned in your prepared remarks. Was that say for the full year, or is that just as you exit fiscal 2004?

That would be from January 1st going forward.

: OK and any long-term goals where you think you might be able to get the operating margin up in that division?

That's what we're talking about. The operating margins. The 13 percent is operating margin.

: Oh, it's operating, not EBITDA?

Correct.

: OK got you. And then a couple of questions on Winstar. The non-core business that you exited in a current quarter. What was that non-core business?

Most of the non-core that we exited was based on buildings that we had exited, because you know they were just not profitable. They were either in locations that didn't make sense for us or the demographics of the particular buildings just didn't fit our profile.

: If I was trying to get an apples comparison with the fourth quarter of last year. In other words, you've backed out that non-core business from the fourth quarter. What would the revenue comparisons look like?

It's hard to say because there were a lot of other changes that happened since the fourth quarter of last year. There were a number of other businesses that we exited and there was a lot of cleanup in our revenue base. So it would be very difficult to really compare apples to apples.

: I guess the last thing Brian would be can you kind of remind us what your cash burn reduction goals are for Winstar and how much burn is left to breakeven over maybe what period of time?

I would love to answer it. We're basically on track. We're completely on target with the guidance that we've been giving for the last six months, which is that we should have a cash burn of approximately $2.5 million by the end of this calendar year in a few weeks. And the cash burn should be at or around breakeven by the middle of '04.

: All right fair enough then. Thank you.

Thank you. Your next question is coming from with . Please go ahead with your question.

Hi. When I was on the road with you guys last week, a comment was made by management that cash burn at Winstar would not get to breakeven unless there is a large government or some sort of large contract. If that's the case -- and we've been -- people have been following the IDT story for several quarters have been you know waiting and you know its like waiting for . Can you give us a better sense of where you are with some of these things which apparently without which Winstar's going to have difficulty breaking through the $2.5 million cash burn rate per month?

Our plan basically called for reaching EBITDA -- reaching a EBITDA loss inside of $1.0 million sometime in the second quarter of '04, of calendar '04. When you hear discussions about breakthrough opportunities with the government or diversity opportunities or what have you, that's really over and above that. The frustration that I sense in your voice is a frustration that frankly, we all share. I mean the U.S. Government as is true of every government, moves at an absolute snails pace.

I can tell you that we have a lot of very interesting initiatives. We basically have in a certain sense discounted those initiatives in terms of our planning. Our sense is that we know that we have a network and we have a product that has tremendous utility for the U.S. Government and we are confident ultimately it's going to kick in.

Bear in mind, we do have significant government contracts, but in terms of the growth of those contracts and the growth of that business, you know we can't really put a marker on a calendar and say it's going to happen at this particular time. So again, we have an organic growth projection which will get us close to breakeven even without those initiatives.

That's seems to be distinct from what we heard last week and positively distinct. Anchor Bay. There seems to be a little -- you know again, some different numbers running around on that one as well. The deal is suppose to close at the middle of this quarter. Now are you -- for second quarter estimation purposes, are you going to be consolidating Anchor Bay as of the beginning of the fiscal quarter November or are you going to be beginning to consolidating - consolidate it at closing for reporting -- for income statement reporting purposes?

As the the activity, we included as of the date of closing, you know for instance if Anchor Bay would close Monday, it would have 45 days in the quarter so we would have their results for half the quarter.

So it will be proportionate depending on what day that the transaction actually closes.

Correct.

That's great. Other than that guys, you know it's a really good quarter and the quality of disclosure is something that we certainly here in the analytical community greatly appreciate and it certainly -- you know reading the press release and listening to your opening remarks, we really applaud the effort that you guys made this quarter. Thank you very much. You know, in terms of my estimates, you guys pretty much were spot on on everything so, good quarter. Keep it up.

That compliment coming from you was regarded very highly. Thank you.

Thank you.

Once again ladies and gentlemen, to ask a question you may press the number one followed by four on your touchtone telephone at this time. One moment while we poll from our questions. Your next question is coming from Averal Guzman of Asset Management. Please pose your question.

Yes, hi guys. My question again is the quarter and the disclosure. I just have a very, very quick question guys. What's the number of shares at the end of the quarter? That'll be my first question. And my second question -- and you probably have disclosed it. Is there any associated cash outflow in relation to your recent purchase of entertainment assets? Thank you.

Regarding the -- again, the weighted average shares were on a diluted basis 82.6 million shares. I think that's a good base to work off of. Regarding the cash flow question on --

Sorry, at the end of the quarter, what you disclose normally in the front page of the Q, can you tell us what the number of the sales at the end of the quarter is?

Oh, OK. How many shares are actually outstanding?

Exactly.

Oh, OK, I'm sorry. Let's answer your second question first and we'll get back to that.

OK.

Actually, I will answer that question now. It's about 83 million.

83 million?

Yes, 83 million. We have time for one more -- No, no, I'm sorry, he asked a question in regards to --

I'm sorry.

I'm sorry, what was your question regarding cash flow on a --

If your purchase of the entertainment assets your recently released purchase, having any cash out front, I don't know how you consolidate these $750 million in change -- I mean division. I mean you purchased those assets, right?

Right. They're all going to be in our consolidated segment of the entertainment division. So basically, Mainframe closed in the second quarter. Anchor Bay will close in the second quarter. Hopefully, very shortly. And those subsidiaries were not -- all you see some subsidiaries in the first quarter, so you will see basically half the results of those subsidiaries this quarter and starting in Q3, 100 percent of the results will be going forward.

And did you disclose the price you paid for that?

Yes, basically the Anchor Bay acquisition is around $60 million and the other acquisitions were considerably smaller.

OK, OK thanks very much.

Thank you for the question. We're going to have to stop right now. As you're speaking in the next couple of days with Sam Abraham, we'd like your input as to whether you think this is good in the morning or is it better in the afternoon. This is the first time in years, we've tried it early in the morning. So thank you very much and we'll see you next quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.