IDT Corp (IDT) 2004 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the IDT Corporation Fourth Quarter Earnings Release Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions following today’s presentation.

It is now my pleasure to hand the floor over to your host, Jim Courter, sir the floor is yours.

Good morning and welcome to IDT Corporation’s earnings call for fiscal year 2004 and our fourth quarter, which ended on July 31st. I am Jim Courter, CEO and Vice Chairman of IDT.

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 certainly limited to the sensitivity of our telecommunications businesses to declining prices; our reliance on success in the prepaid calling card market; our ability to obtain cost-effective termination capacity worldwide; the impact of changes to the UNE-P regulations; increasing competition in the consumer phone service market; our ability to manage Winstar-related restructuring costs, our ability to integrate and manage acquisitions, external factors in the motion picture and television industries; general economic conditions in the global telecommunications market; the general condition of the economy of the United States and internationally, the disruption of our facilities and operations due to a variety of causes, including of course war, terrorism, act of God; and any of the other specific risks and uncertainties discussed in our reports filed with the SEC. We assume no obligation to update any forward-looking statements that we have made or may make or to update you about the factors that may cause actual results to differ materially from those that we have forecasted.

Before I begin, and talk about the quarter and year, I would like to say a few words about the great American who recently passed away, Christopher Reeve. When I first met him, here at IDT as he was launching his work on our animated film Yankee Irving, the first thing he said was please, call me Chris. Then I remember Howard Jonas, our Chairman walked in the room and he said to Howard, "Hi, Boss." He had a great sense of humor and then we got down to work. Chris Reeve loved the script from the very beginning and he became fascinated with the project. I remember him saying, he wants to make sure that the animated [Bay booth] and the animated [Blue Berry] looked like they did in real life, and of course so they will.

He went on from there for a couple of hours, two hours that I will never forget. His fingerprints and his inspiration are embedded in the film Yankee Irving. We will finish this film because he would want us to do just that. We will dedicate the film Yankee Irving to him along with dedicating a good percentage of the profit to the Christopher Reeve Paralysis foundation. It would be fitting and proper to do so, because it is a story about a boy who preserved and prevailed against almost impossible odds just like Chris Reeve. We at IDT will miss this great and courageous American. And now for the quarter.

I am pleased to report that fiscal 2004 was another record breaking year for IDT. We recorded revenue of more then $2.2 billion, a more than 20% increase from fiscal 2003. We accomplished this in a year when the telecom industry and the long distance market in particular continued its trouble, with some of the leading players seeing significant revenue declines. As has been reported in the press AT&T and NCR are exiting the residential phone business and have announced significant staff reductions. We continued to prove that we can capitalize on the opportunities that exist in turbulent time.

IDT Telecom continues to represent the majority of our operations and [a driver] of our performance during the year. Our telecommunication division recorded revenues of over $1.9 billion and operating income of over $78 million during 2004 and the fourth quarter was the division's 12th consecutive quarter of positive revenue growth and operating income. We earned record quarterly revenues from our calling card operations which increased nearly 20% from previous quarter. Minutes of use for telecommunication services were 5.8 billion for the quarter and 20.5 billion for the fiscal year. Those figures representing a 31% and 24% increase from the prior periods. Most of the growth in usage came from our prepaid calling card business. We grew our U.S. operations moving into additional geographic areas and ethnic communities and expanding; our European, our Asian and our Latin American calling card business. July 2004 was our first ever 2 billion unit month. At the end of the year, we had over 2,80,000 customers in 13 States for our America Unlimited flat rate plan, it’s a bundled, local and long distance calling plan, representing a 25% growth in subscribers from the previous quarter.

We are signing up customers that are new to IDT and are seeing migration of our long distance customers to this plan which generally represents significantly higher revenues per subscriber. Our wholesale telecom segment produced its best financial results in the last four years, seeing a 29% increase in revenue and a 36% decrease in its operating loss. The revenue growth came from both U.S. and international volume and was driven by increases in our businesses with Tier 1 customers.

Now to IDT Entertainment, IDT Entertainment had a tremendous showing in its first full year of operations and the results proved that it is a key part of our Company and a strong driver of our growth. The Division had over 100 million in revenues for the year complemented several exiting acquisitions, entered into promising joint ventures and started work on many projects. We own and control four animation production studios that combine leading expertise on both 2D and 3D CG animation. These studios work independently but cooperatively on our own projects bringing all of their diverse resources and expertise under one umbrella. We have produced top quality work for theatrical, television and direct-to-video DVD releases, and are working on our own proprietary projects.

We continue to expand our presence in the Video and DVD distribution market by adding Manga Entertainment, a leader in producing and distributing anime, a form of animation developed in Japan that has a strong and growing following both in United States and Europe. While continuing our top notch production work for third parties and the direct-to-video market, we are rapidly moving forward on two feature films using content that was own, one being of course, Yankee Irving that I mentioned previously in my statement. We expect to theatrically release this film and at least one other with a major distributor in calendar year 2006.

We are excited about the prospects for these projects. As we close out another fantastic year end quarter, ironing [the end] of reporting on strong results while emphasizing that I believe our best days are ahead. As Christopher Reeve once said, "So many of our dreams at first seem impossible then they seem improbable, and then when we summon the will, they soon become inevitable." I would now like to turn the call over to our Chief Financial Officer, Steve Brown.

Thank you, Jim. Good morning everyone. As Jim mentioned, revenues for both the fourth quarter and the full fiscal year 2004, were records for IDT. Full year consolidated revenues grew 20.8% to $2.2 billion from $1.8 billion in fiscal 2003. Q4 revenue of $611.2 million represents a 25.8% increase over the prior year's quarter and 8.1% sequential increase over the third quarter of fiscal 2004. Other highlights include a 23.8% surge in year-over-year operating income for our IDT Telecom unit to $78.4 million in fiscal 2004 from $63.4 million for fiscal 2003. IDT Entertainment reporting fiscal 2004 revenue of over $100 million in its first full year of operation, and cash, cash equivalents and marketable securities remaining again above $1 billion at the end of the fiscal 2004.

Our fourth quarter fiscal 2004 net loss was $23.3 million or $0.25 per share negative as compared to a net loss $76.8 million or $0.85 loss per share in the third quarter of fiscal 2004 or to net income of $8.3 million or $0.10 per diluted share in the fourth quarter of fiscal 2003. For fiscal 2004, IDT recorded a net loss of $95.7 million or a negative $1.09 per share compared with a net loss of $17.5 million or $0.22 negative per share in fiscal 2003. Fiscal 2004 operating cash flow, more than doubled to $76.8 million from $37.1 million in fiscal 2003.

Now IDT Telecom, for fiscal 2004 IDT Telecom revenues increased 18.3% to $1.9 billion. This is compared to fiscal 2003 revenues of $1.6 billion while operating profits rose 23.8% to $78.4 million from $63.4 million in fiscal 2003. The fourth quarter was the 12th consecutive quarter during which IDT Telecom produced sequential revenue growth and positive operating income. Telecom revenues for the fourth quarter of fiscal 2004 increased 24.1% year-over-year and 12.2% sequentially. IDT Telecom's minutes of use for the fourth quarter of fiscal 2004 increased 31.4% year-over-year to 5.8 billion minutes from 4.4 billion minutes and increased 18.1% in fiscal third quarter 2004s 5 billion minutes with most of the gain attributable to growth within United States calling card business. Notably the company recorded its first ever 2 billion minutes month in July 2004. For fiscal 2004 minutes of use increased 24.3% to about 20 billion minutes from about 16 billion minutes. Retail minutes of use rose for fiscal 2004 by 24% to 15.6 billion while wholesale minutes of use advanced 25.3% to 4.8 billion.

Retail Telecom revenues for the fourth quarter increased 29.3% year-over-year to $411.7 million, a 19.9% increase from the third quarter fiscal 2004. Income from operations for the fourth quarter was $21.6 million, a 13.2% decline year-over-year and a 4.5% decline from the third quarter. Calling card revenues were $333.2 million in the fourth quarter of fiscal 2004 a 19.9% increase as compared with the $277.9 million of revenue recorded in the third quarter and the 19% increase from the $280.2 million of revenue generated in the fourth quarter of fiscal 2003. The revenue increase was driven primarily by strong gains in the United States with several new aggressively priced cards which were launched during the third quarter, sold well during the fourth quarter. As we have often mentioned on these calls, aggressively marketing new cards will result in a narrowing of calling card gross margins and this did cause a 30 basis point decline to 22.4% from the year ago level of 22% and a 80 basis point decline from the third quarter level of 23.2%. However, due to the higher revenues, calling card gross profits increased to $74.6 million and this reflects a 15.7% and a 17.3% increase respectively from the preceding and year ago quarters.

In fiscal 2005, we anticipate that calling card revenues will remain stable at or near the current levels with some sequential growth margin improvement over the next two quarters. For full fiscal 2005, we expect some additional revenue growth in calling cards as compared to full fiscal 2004, mostly from our operations in Europe, South America and Asia with relatively consistent gross margins.

Consumer phone services generated revenues of $78.5 million in the fourth quarter of fiscal 2004. This is up 20% from the $65.4 million in the third quarter of fiscal 2004 and more than double these $38.1 million of revenues recorded in the period a year ago. The customer base for America Unlimited, the IDT calling plan which features unlimited local and long distance calling within United Sates for a fixed monthly rate grew to approximately 280,000 customers by the end of the fourth quarter an increase of 25% sequentially. The service is now offered in 13 States and we expect it to be offered in 20 States by the end of fiscal 2005.

In addition, we had approximately 407,000 additional long distance only customers at the end of the fourth quarter. Consumer phone services recorded gross margins for the fourth quarter of 49.3% compared to margins of 51.8% in the third quarter and 55.3% in last year’s fourth quarter, but understand that the declining gross margins reflects the continued shift in customer mix towards lower gross margin bundle local and long distance customers. However, these customers are generally more profitable in absolute gross profit dollar terms as they generate higher average revenue when compared to long distance only customers. We expect this shift in mix to continue for the foreseeable future.

Fiscal 2004 also saw IDT Wholesale Telecom produce its best financial results since fiscal 2000 by generating $524.5 million in revenues, a 29.3% increase from fiscal 2003s revenues of $405.5 million and posted a loss from operations of $17.6 million, a 36.3% decrease from fiscal 2003's loss from operations of $27.6 million. Revenue growth in dollar terms in fiscal 2004 was nearly -- evenly divided between U.S. and internationally originated wholesale business.

Domestic and international revenue growth was driven by increased business with established Tier 1 customers and an increase in the number of customers. Wholesale telecom will continue to focus on servicing these Tier 1 customers in fiscal 2005, during which we expect most wholesale telecom revenue growth to be generated by our international operations.

During the fourth quarter of fiscal 2004, postal wholesale telecom achieved revenues of $128.9 million, 9.9% higher than the year ago quarters a $117.3 million and a 6.9% decline from the record of $138.5 million of revenues generated in third quarter of fiscal 2004. With the volume of minutes remaining virtually unchanged with the third quarter these sequential quarterly revenue decline was largely attributable to lower per minute price realizations owing to both a shift in destination mix toward lower revenue destinations as well as intensified levels of price competition to some location.

Wholesale telecoms growth margins were 10.3% in the fourth quarter, down from 11% in the third quarter and 10.9% in the last years fourth quarter. The reduction in margins was the result of the decline in the per minute price realizations. For fiscal 2005, we expect some sequential improvement in gross margin with full fiscal gross margin anticipated to be between 10.5% to 11%, consistent with the gross margin performance of the past two fiscal years. IDT telecom's international operations continue to account for a growing portion of overall revenues with non-U.S. revenues representing 23.9% of total revenues in fiscal 2004, up from 21.6% in fiscal 2003.

During the fourth quarter revenue from international operations accounted for 22.6% of total IDT telecom revenues compared to 24.7% in the third quarter and 21.4% in the fourth quarter of fiscal 2003. The sequential decline in international revenues as a percentage of overall IDT telecom revenues was due largely to the strong growth in the U.S. based calling card business, which accounted for the bulk of the gain in IDT telecom's overall revenues during the fourth quarter. IDT telecom is experiencing growth in all of its major international divisions including, Western Europe, Russia, Latin America, and Asia Pacific; and expect that international revenues will continue to account for growing proportion of overall IDT telecom revenues in fiscal 2005.

IDT telecom recently completed the build out of its Asia Pacific gateway switching facility in Hong Kong, giving us network infrastructure necessary to pursue our expansion plans in the region which involve both wholesale carrier and retail calling card [operation countries]. We anticipate that our Asia Pacific operations will be a key revenue driver in fiscal 2005 and obviously beyond. We currently market our calling cards in Hong Kong and Singapore, with retail expansion into China, Japan, and Taiwan all expected during fiscal 2005.

We are also currently interconnected with 40 carriers in the region, allowing us to revive wholesale carrier services for traffic terminating both within Asia as well as internationally. Now IDT Entertainment; IDT Entertainment revenues were a $106.7 million in fiscal 2004 as compared to $5 million in the fiscal 2003. As all of you are aware, most of the increase in revenues was a direct result of several acquisitions, most particularly the acquisitions of Anchor Bay and Film Roman. In fiscal 2004, the loss from operations was $600,000 compared to a loss from operations of $2.4 million in fiscal 2003. The improvement in operating performance was primarily due to the operating profits generated by Anchor Bay, somewhat offset by the costs incurred in increasing the division’s corporate infrastructure.

IDT Entertainment’s revenues were $30.7 million for the fourth quarter of fiscal 2004 compared to revenues of $40.7 million in the prior quarter and revenues of $4.4 million in the fourth quarter of fiscal 2003. The revenue decline was primarily due to the seasonal and cyclical factors in our video distribution business, which make up the largest part of our revenue base currently. Generally IDT’s fiscal first and third quarters are the strongest for our video distribution business due to the holiday and other seasonal factors. In addition, the revenue decline in the fourth quarter was exacerbated by the temporary operational disruptions in our video distribution business caused by the transfer of certain of our fulfillment and logistical functions to a new strategic outside provider, Fox Home Entertainment. These functions have previously been performed to a combination of the in-house and external resources. The shift in providers which was concluded during the first quarter of fiscal 2005 should lead to increased profits of potential new business which will be materializing in Q2 of fiscal 2005. Loss from operations was $1.2 million in the fourth quarter of fiscal 2004 compared to income from operations of $2.4 million in the third quarter of fiscal 2004 and an operating loss of $600,000 in the year ago period. Gross margins in the fourth quarter improved 290 basis points to 37.7% compared to the prior quarter’s 34.8%. During the fourth quarter SG&A expenses were essentially flat in dollar terms compared to the prior quarter but increased from 26% as a percentage of revenues in the third quarter to 33.8% because of the lower fourth quarter revenue base.

Although IDT Entertainment expects that there are significant benefits from equity stakes in some of its productions, earnings in the near term will be primarily generated by its licensing and video distribution businesses such as Anchor Bay and Manga and by production service contract work. We expect that total entertainment revenues for fiscal 2005 will likely approach $200 million as many of our acquisitions will be consolidated for full fiscal year period for the first time. By late fiscal 2006 in addition to ongoing video distribution and service contract activities, IDT Entertainment expects to bring several projects in which it owns the intellectual property to market. Included in this, is the first theatrical release of IDT Entertainment’s first internally developed CG animated feature film "Yankee Irving". Thereafter, IDT Entertainment anticipates to theatrical release two to three CG animated films per year as well as various smaller budget, limited theatrical release projects and directed video films which will be distributed by Anchor Bay. As a result of this and our continued intention to increase the purchases of licenses of Anchor Bay's products we expected that IDT Entertainments retail distribution revenues will snowball.

Now IDT Solutions. As previously announced in May the IDT Solutions division is being restructured and IDT no longer markets, retail switch communication services to commercial customers using the Winstar asset. As of September 30th, substantially all of IDT Solutions commercial customers representing approximately 95% of total IDT Solution revenues have found replacement services and are no longer on the Winstar network. IDT Solutions currently provide service only to select governmental customers in 14 markets.

IDT Solutions revenues were $13.7 million in the fourth quarter of fiscal 2004 compared to revenues of $17.2 million in the prior quarter and revenues of $21.6 million from the fourth quarter of fiscal 2003. Operating losses in the fourth quarter of fiscal 2004 were $21.6 million including an $8.7 million restructuring impairment charge versus $55.4 million in the prior quarter which included a $28.1 million restructuring and impairment charge, and a $21.3 million loss in the year ago period.

For fiscal 2004, IDT Solutions recorded revenues of $71.6 million down 18.2% from the $87.6 million reported in fiscal 2003. Operating losses were a $112.5 million in fiscal 2004 compared to a fiscal operating loss of $88.8 million in fiscal 2003. We estimate that total IDT Solutions net loss in fiscal 2005 and beyond as a result of the ongoing restructuring and business service discontinuation activities will be approximately $25 million to $30 million. We also estimate that the total net cash outlays in fiscal 2005 and beyond to fund the operating losses and to satisfy all the remaining liabilities of IDT Solutions will be approximately $45 million to $50 million.

Now regarding Voice over IP, as usual I will refer our investors for any information regarding the results of our Voice over IP segment, please refer to the separate earnings released and a 10-K issued by Net2Phone.

Finally, to go back to our balance sheet. Our balance sheet continues to be one of the strongest in the industry. As I mentioned before cash and cash equivalents, marketable securities are close to $1.1 billion again and a important information for going forward we anticipate investing approximately $85 million to $95 million in capital expenditures mostly to bolster our network infrastructure in the U.S. Europe, South America and Asia as well as adding an additional switch in both the U.S. and the UK.

We also plan to invest an additional $75 million to $85 million in our proprietary film productions as well as an investment in film licenses. We anticipate that these entertainment investments will be bank financed non-recoursed to IDT and as a result we expect cash, cash equivalents and securities to remain relatively constant. Of course for more information, please refer to our press release and our 10-K which will be filed shortly.

At this point, we at IDT would be very happy to take questions. Joining Jim and I on the call are Marcelo Fischer, Controller of IDT Corporation; Norm Rosenberg, CFO of IDT Telecom; Morris Berger, CEO of IDT Entertainment, Sam Abraham, the CFO of IDT Entertainment and Bill Pereira (phonetic) which you all know from Solutions/Winstar.

Thank you, the floor is now open for questions. If you would like to ask a question please press "*" followed by "1" on your telephone keypad. If at any point your question has been answered you may remove yourself from the queue by pressing the "#" key. We do ask that while you pose your question please pick up your handset to ensure the best possible sound quality. Once again ladies and gentlemen if you do have a question please press "*" followed by "1" on your touchtone phone at this time. Our first question is coming from Peter Gorge (phonetic) with Card Capital.

Hi, good morning gentlemen. Can you please comment on Europe a little more and the telecom industry there and the calling card industry in Europe?

You know I think in Europe it really depends on what part of Europe are you are talking about. Most of our operations right now are based on Western Europe, very developed part of the continent of course which really closely, pretty closely resembles what we see in U.S., very competitive market place, very segmented market, very fragmented market place where we are competing against a lot of different companies and generally different companies in each country in which we operate. You know we continue to grow, I think that looking forward most of the growth is going to come not necessarily from additional growth on our core markets like U.K., the Netherlands and Spain. But from some increases in some of the newer countries; countries like Italy and France and Scandinavia where we -- even we have been pleasantly surprised by our ability to penetrate those markets to date. We also are probably going to continue to move a little bit eastward, to places like the Chez Republic, or to Poland or some other of the smaller East European countries in order to expand our card sales. So I think it’s a matter of expanding footprints as opposed to going much deeper in some of our existing markets.

Competition in those areas?

Competition in every area is intense I think that when we look to go into a market, we never count on having an easy time from a competitive perspective. But we think that we -- we ourselves are very competitive. We think that we have a high quality offering at a good price and we have a certain scale that allows us to do things better than most others. And once we get distribution rolling, I think, that we are able to compete very effectively.

Well thank you.

This is Jim Courter, let me just add to that. You know my own personal view is the fact that the competition in Europe is no different than the competition in the United States and we have done very well in United States, we anticipate we will do well in Europe.

Sir, does that answer your question?

Thank you.

Thank you, our next question is coming from Reg King (phonetic) with W.R. Hendrick (phonetic).

Great, thank you. Many be this question is best for Norm, I was just wondering if you have to comment a little bit more -- if you could, once again just review a little bit the growth statistics that you saw during the quarter on the -- I think the America Unlimited plan. Have you seen any increase in competitive offerings in the market and then, can you give us an idea where your focus is on expanding the services, we go out the next several quarters will be, more so on expanding in the new geographies or should we see an expansion of the service offering?

Okay, [Reg], I am going to take your questions out of order because I remember them that easier that way. As far as whether we are going -- this is the question we ask ourselves all time, are we going to go deeper or we can go broader. I think that obviously the answer is a little bit of both and I think we indicated in some of our information that we want to get into more space compared to what we are doing right now but I think that ultimately the biggest thing for us right now -- the number one driver is to get more depth and to get more scale in the existing markets, there is still a lot more that we can do in New York and New Jersey and in Pennsylvania, there are lot of different things that we can do. That's step one. The other thing that we can talk about is trying to see to it that we can increase the average revenue per customer and by that we have to increase the number of offerings, or the amount of offerings that we have, we just -- we are just about rolling out a voice mail package to our existing and our potential customers and that’s another thing, that can get us another couple of bucks per month per customer. So that's important to us as well. With a lot of the uncertainties surrounding UNE-P, I think we found that, that ultimately whatever strategy we go with there, we are going to be -- it would behoove us to have more of a scale in some of the particular large -- particularly larger markets. So that's probably a biggest area of focus for us. Saying that it is -- if I look back a year -- a year from now I'm looking back and I see that we're in only a couple of more States than we are in now, but we have a lot more depth in those States and we have lot more customers, I'd be fine with that as well. As far as the talk of growth or competition -- competition remains significant; obviously there have been well publicized announcements by the likes of AT&T and others that they will no longer statistically go after some of the residential local customers that we're looking at. So on paper that would have resulted or that should result in even if certain part of the competitive pressure, we haven't really seen anything more than anecdotal evidence of that. But you know we keep track of what it costs to bring in a customer. We have some various well specified and well defined ranges as far we are willing to pay to bring in a customer, based on the different markets and different States and then as long as we stay within that area, we think, we can continue to grow and we're still going to devote a decent amount of money to bringing in new customers.

Let me answer that if I may -- this is Jim Courter again. You know we hear a lot about UNE-P and the, I guess it’s the DC Circuit Court decision to over throw the SEC regulatory decision with regards to keeping rates down and having some sort of price controls on access fees from the [Bells]. You know clearly number one, that you know, that regulatory climate is still up in the air and the SEC's committed, I spoke with the Chairman of the SEC a few days ago and they are committed to do it right before time. Whether they will or not, we don’t know but you know it's not clear that the Bells can charge whatever they want and that’s number one.

Number two, you know we are in a business relationship with all four RBOCs and we provide them international termination at very favorable rates and they are happy about that. They use us a lot and they are using us more frequently than ever before. And you know we would in return want to negotiate with them favorable rates with regard to access you know to consumers. So you have two business people, one providing an international termination rate and another providing access to consumers and we will sit down at a bargaining table come up with what is fair and reasonable in the best financial interest of both companies. So this is not a dictatorship. It's going to be a negotiation from partners I think of equal strength.

Right.

Finally, you know the Bell, you know I have spoken to all of them; they are not going to sit down and say that you know they have a monopoly. They don’t have a monopoly anymore. You know they have IDTs at growing number of competitive local exchange carriers and also they have competition from cell phones. They have increased potential threat from voice over cable. So they can't sit there and charge whatever they want because if they charge too much they are not going to get the client, they are not going to get the subscriber. They are going to lose that home to a cable company. So there is many factors here that we think are in play.

And then just a real quick final one, the only thing I'll mention is that, something that’s important for our investors and others interested in the company to understand is that we see as we go forward when we talk about consumer phone services, we are going to be talking about not just the U.S. business but a international business as well. We alluded to our consumer phone service business in the United Kingdom which we market under the Toucan label. We expect to and hope to expand that label to other countries in Europe like Belgium and a couple of the other countries over the next fiscal year. We currently have -- as of today, we have about 50,000 active customers on that particular product and we are going to spend significantly over the coming 12 months to expand that product. And not that there aren’t risks over there but that does help you mitigate some of these regulatory risks that we have in U.S. by balancing and having a plenty of business in other countries where there is opportunity as well.

Right, thanks a lot Norm, thanks Jim.

Thank you. Our next question is coming from Donna Jaegers with Janco Partners.

Hi good morning. First let me express my condolences to the management, I realize you guys were very close to Chris Reeve and I am sorry for his untimely death. Let me ask two questions if I could. First could you update us on the creative status of Yankee Irving? How far did Chris Reeve get with the process and then I have a question on calling card business?

Sure. Hi this is Morris Berger. Obviously we eco those sentiments. The company took a devastating loss was in grief as well the rest of the country. As far as the film and the production and the creative aspect of it we had been working with Chris for approximately a year now on the film from the beginning of the story. Chris' vision of the story, the production, the style of the art and the characters and casting has all been completed. So we are in pretty good shape as far as carrying on the vision that Chris had for the film. We have had meetings over the last few days with the Heads of Production and we feel very comfortable in saying that the schedule will not be altered at all. The creative is all set and we are just going along the technical production of the film as we speak.

In addition, we do have quite experienced producer on staff, [Ron Pitt], who among others films has produced the animated film, "Space Jam" and we feel confident that the team has enough in place from Chris and nothing but to go ahead.

Thanks. Then on the calling card business, could you give us some indication you guys have been -- you reported great numbers on that business on the revenue side. What was your growth from the new markets like California and Texas?

It’s Norm Rosenberg, hi, Donna. As far as that’s concerned, I think that the best way to describe that growth really is, as an across the board kind of growth. It was not -- what you had during the quarter is really a growth in all of our markets including California but California was only part of the larger story. So, it wasn’t really a matter of our existing markets remaining static and seeing a big piece of the growth in California or Texas. Those continue to grow at a nice measured pace but this is really about growth in everyone of our markets. As you probably know, the way it works here is that card revenues tend to ebb and flow a little bit within a range higher than where they had been in the past. Late -- at the tail end of the second quarter and something we eluded to while reporting third quarter we had often a lot of aggressive cards; we drop rates looking to -- on many cards looking to generate more business. We have been able to do that and I think Q4 was really the result of some of the things we did throughout the third quarter. That having been said, in terms of very vague guidance for everyone, as we look out to Q1 which is well on it’s way here, obviously more than two-thirds complete, as we entered into Q1, it came time for us to swing the pendulum a bit the other way, for us to take the money off the table so to speak, I wouldn’t say [full harvest] like we saw in Q2 of fiscal '04, but I think that you will see in Q1 is maybe revenues flattening out or coming down a bit from what we had seen from the record Q4 levels, but you should be able to see hopefully a higher profit per minute or gross margin, the number than what we've seen in Q4, where we sacrificed some gross margin to see [ground] a little bit too earlier in order to grow that topline. So that's how we tend to mange the business. We sort to open it up full throttle, we pull back a little bit; but the idea is supposed to be that as we go on we're able to generate more gross profit dollars in the absolute term as we go forward.

Great. Thank you.

Thank you. Our next question is coming from Richard Klugman with Jefferies.

Thank you. Norm you just answered actually my first question there, I was going to ask, were you see gross margin per minute in the calling card business, going forward and I think you started a along those lines. So maybe that's a good place to start, where did that -- I haven't done the math but where did that come up to in the fourth quarter and where do you see that flowing throughout 2005, that it's really relevant point to look at it, isn't it?

Absolutely Richard, and we have talked about this in the past, not everybody here necessarily agrees with me, but you know that my particular -- you know my bias is always towards looking a things on a permanent basis and I am not going to launch into an explanation or reiteration why because will be going whole morning. But during the fourth quarter on the debit card side, we did see a relatively significant drop in -- and again you talk about 100 or some penny a minute, but we did see another drop in profit per minute on the debit card side. Obviously we made up for it in volumes, but I think that you are going to see an improvement going forward little bit and we would like to get it stabilize. Now part of that is by -- part of that is done by controlling our network. You know one thing that Jim had eluded too earlier, I believe is that we had our first two billion minute month in the -- we had our first two billion minute month in July, July was an enormous -- excuse me, Q4 was an enormous month for us in terms of, in terms minutes overall and what makes me a happy about that, I am never happy about a huge number of minutes, I am more happy about profit and revenue obviously. But what I like about it is, is that we are able to add, we are able to add minutes as we did for our network this year, growing our networks by -- growing on minutes by 24%, 25% across the Board, across the world; without really adding any significant gateway switching capacity in terms of ports in the U.S., which was really a trick and it’s a tribute to engineering operations because they were able to re-engineer the network, make us more and more efficient. And if you look year-over-year in our statistics of profit per port, minutes per port, every single metric that we look at we have been a lot better. Now as far as going forward we are going to try to keep that going because we want to protect some other company's cash flow obviously. And I think that what we want to do is we want continue to focus on making the most of the minutes that we already have. And so I think minutes are going to grow in fiscal '05, if things go according to plan you are not going to see the same types of minute growth that we have seen over the past three, four, five years or way back to the beginning of our existence. And what we are trying to do is, we would like to see much more stability in terms of the revenue and profit per minute, and measured increases in our minutes volume. And not only that but when we look at the break down of the where that -- those minutes increases are coming from on the origination side, more heavily rated for is international as compared to the U.S.

Two unrelated questions, if I could. One is the local ads in the U.S. on the America Unlimited were down despite the -- despite adding new markets and despite -- sounded like that you discussed in the release higher SG&A, am I wrong to interpret that that its less effective than it had during the last couple of quarters?

No I don’t, I mean that we look at it day by day and week over week. I don’t think our spending levels were significantly lower in the U.S. I think that what we did, we set ourselves a very hard budget in the U.S. and we have done that through to fiscal '05 and what we have done is, we really tried to -- yeah as we have mentioned, we are not scared way by the UNE-P uncertainty, but we are going to be a bit educated about it and we are trying to put a number out there in terms of advertising that we think we can, will allow us to get a part of return on investment that we would like to have. One thing that I have to mention as we go in for the fall season is, we have always focused on the cost of being able to run the advertising, and one thing that we have to bear in mind is that, if you look at the two presidential candidates, I think between the two of them, they probably raised something on the order of half a billion dollars, and how much of that money is going to be spent over the next five, six weeks. In fact a lot of that money is going to be spent in some very [specific swing] stakes as well. So when you look at some of our markets, we are just getting crowded out and there is sort of a crowded out -- crowding out effect that affects us. We will not chase that we would rather wait until we can get some -- until the dust settles and we get some better rates. The other thing that we have done is, we have been pretty nimble in shifting between print ads versus TV ads and how we managed the budget and allocate between those two different -- not only between those two different mediums but also medium of between among the different States and the markets that we currently offer the service in, and a lot of that has to do with not only looking at the absolute cost for adding a customer for, lets say print versus the television ad but also for the relative value of the customer that we bring in. If we for example it costs us more to bring in a print customer, but on the average that print customer is a higher valued customers in terms of the low return, lower bad debt, higher spend or whatever it might be, then we run the math and we say well its still, we get a higher return on investment dollar by doing it on the print side versus the television side. So I think, our peak in terms of monthly spend here in the U.S. probably happened in the, I would say, March, April, May period, so the end of Q3 or the second half of Q3, the very beginning of Q4. So from that level, we are down a little bit but we are still spending at a very robust level here in the U.S. and then when you add-on the amount of money that we are spending in the UK where we are aggressively trying to expand our Toucan product which is consumer phone service product over there I think that you are going to see some big advertising spend. But again, you will not -- those numbers are not written in stone and ultimately we have certain levels of cost per customer acquisition that we have targeted or ranges that we have targeted in order for us to make that spend and if we were to find that we were not as successful for one reason or the other in bringing customers at the prices that we want to, there are two things we would do. Number one, we would shift our strategy in terms of the actual advertising and marketing and number two, we would pull back on those a little bit from a dollar and cent perspective. But I have to think that SG&A is going to remain at those levels because I am confident that we can bring in those customers.

Also keep in mind in advertising that we target different areas. In other words, if we think we are gaining traction in New Jersey and in New York and we were licensed in a different part of the country, and were capable of providing local and long distance there as a [sea link] then the advertising shifts to a different market. So if you are just sitting in one market, you may think that our advertising is going down but that may not be necessarily the truth.

Okay. Finally, if I could, there you talked about the 75 million to 95 million for the film production and I wasn’t quite sure I understood how will that show up in future quarters?

Hey Dan (phonetic), Sam Abraham.

Hi, Sam.

Our intention over the course of the fiscal '05 is to invest as we mentioned in the release, 75 million to 85 million; that is not strictly for investments in feature films. That's the total investment of all our entertainment activity including purchases in new license acquisitions, financings some of our lower budget horror pictures that we just begun in our -- with our New Arc initiatives. The intention for raising -- basically we're seeking outside invest -- outside financing from bank facilities to cover the majority of those investments over the course next few years.

So we should see a, you know, a dead line item on your balance sheet going forward?

That is correct.

Okay. Because I thought I read something about it being off balance sheet in nature, that's not the case?

No, it's not the case.

Absolutely not. And our whole purpose in this industry is to try to minimum -- you know minimalize your risk. So the financing that's available is very specific to the [copies] that we're investing in and are non-recourse to not only IDT Corporation but most of the other asset of IDT Entertainment.

Okay. Thanks a lot.

Thank you. Our next question is coming from Donna Jaegers with Janco Partners.

All right. Thanks for taking another question. I was just curious on the UNE-P business. You are certainly sounding cautious and everything else I was wondering, you talk about your cost for growth ads could you sort of flesh out those numbers in the ballpark? And lot of industries are worried about the churn in this business, can you give us any sort of guidance on the churn you are seeing?

Okay. We really don't share the cost for growth ad. I will give you a very wide range if I can, because it really does range even from day-to-day and from market-to-market and medium-to-medium but I would say that you know probably about $100 to $120 per customer all in terms of bringing in a customer on that particular local bundle plan. As far as the churn rates are concerned, we are not seeing a significant amount of churn. It is very early for us, so it's hard for us to see -- it's really difficult for us to see where the churn is and what level it is. I think that most of the churn that we are seeing is very early on in a customer's life cycle. For some reason people get cold feet, or for some reason people get a bill and you know for whatever reason didn't understand what the product contained and what the service contained. We are not getting much of the -- you know we can tell why customers leave and we are not saying that is hardening to me although I try to remain cautious is that we are not seeing lot of customers who leave and say well you know the RBOC offered me $100 check to come back or AT&T offered me a $100 check to join or any of the you know I think the fiscally irresponsible things that lot of companies do to just grow dollars around and get customers, then lose them and get them back and do that kind of things. So I don't thing that it is so much a matter of our competition as it's just a matter of the nature of the people who switch.

You know one thing that we always talked about is that - and this goes back when we were offering and we continued to offer long distance service, you know we know where we fit in from the industry prospective. We know that we are not, people are not -- people are choosing IDT mostly on the basis of price, they are happy with the quality. They are not the type of the customer that chooses IDT by definition, a customer who is an educated consumer if you will. Someone who is willing to say I don' need a Verizon branded dial tone specially when you consider that on the backend it's exactly the same wires and the same line, and the same network effectively that’s offering the service. I'd rather have someone who can offer me the exact same service with obviously exact same quality level at a lower price. So some are definition a more savvy customer and is therefore more likely to churn away for one reason or the other. You don't have a lot of those sleeping dog type of customers who will sign off for us because they say hey IDT, I like that brand name and I am going to have it and I am going to keep it for 2 or 3 years. It’s a challenge that we always face but I think we are managing it pretty well.

Let me add something to that. And I have spoken to you know high level people of MCI and AT&T, people that have been in the business for from AT&T standpoint I guess about a 140 years. But you know the churn is higher in the beginning and less at the end, in other words, someone whose been with you for just a month, the churn is quiet high; but if they have been there for six months, the churn is much less than those that have been there a month. And I think if they have been with you for a year, you know the churn is less than those that have been there for six months, in two years like wise. You know, so you know we are new in the business and so therefore I think the churn is going to gradually come down based on the experience of you know the major long distance carriers such as AT&T and MCI.

Thanks.

Thank you, our next question is coming from Todd Rosenbluth with Standard & Poor's.

Hi good morning everyone. I guess is that up towards Norm, Norm you are talking about a lot of puts and takes in advertising coming down a little bit and wholesale pricing coming up. Can you give a little bit of thought, some soft numbers out there for Q1? Can you give a just a broader picture on so how you think the year is going to progress on the telecom side and if wholesale rates are going to be going up in all of your markets?

Yeah sure thing Todd. You know when we look at our consumer phone services business in fiscal ’05 as compared to fiscal ’04 in terms of the budgeting which obviously reflects the direction in the strategy that we have, I think it to some extend failed the two markets. As I mentioned earlier, there is not only U.S. business, there is also a business in the U.K and potentially in a couple of other countries within the European region. And I think that the different businesses are going to be managed based on the different stages of the life cycle based on the different regulatory risks that exists or do not exists in different businesses. So in Europe, I think we are going to continue to spend very aggressively, we are going to spend a lot of money and see what we can do in terms of bringing in customers. In the U.S., I think we are going to continue to spend what I will refer to as a significant amount and a substantial amount but at the same time we are going to be very cautious about it. When we look at building our models, we did not naively assume that the cost structure that exists today and that the general environment that exists today will exist forever. I think, that would have been very foolish frankly, if we had done that. And if you look at our models such as they are now, our assumption was, when we built our models that through January we would basically have the same cost structure and in fact that has since basically come to pass with a effectively a six month [brief] that will take us through that period to our fiscal second quarter. And in the second half of the year, in our models we would expect that the gross margin would begin to come down. Now remember, as I think Steve Brown was the, who has prepared comments earlier on closed margins when measured as a percentage have been coming down because there has been that shift from the higher gross margin but lower growth profit dollar long distance only customer to more of a bundled customer who carries on the one hand a lower gross margin percentage number but a higher gross profit dollar. So that will continue. In addition we do expect some increases in our cost for UNE-P, in a way we have modeled that out is we have done something of a scenario analysis where we say you know there is a 25% chance it will go up by X percent there is a 25% chance it will go up by Why percent and we continually tinker with that. But on balance I think that what you see in this business is the following. I think that you will see overall combined, when we talk about combined LD plus, LD plus the bundled offering where you have roughly 680,000 to 700,000 today, I think we will have about that same number or a little bit higher in total as we go out towards the end of fiscal '05, but obviously there will be a significant shift, and a continued significant shift away from the LD only towards the local business. So we are going to have a higher revenue per customer, we are going to have a higher gross profit per customer. At the same time I think that you are going to see some gross margin decline as you go out from the first half of the year towards the second half of the year, the gross profit dollar should continue to rise.

And on the calling card percent of the businesses?

Calling card side of the business, again it is going to ebb and flow. I think that you're going to see improved gross margins in Q1 versus Q4, I think you are probably going to see a little bit of drop in, it would be natural to have a little bit of a drop or step back in revenues in Q4, in Q1 versus Q4. Although again I can't really talk about the quarter that we're currently finishing up, but I can say that again on the revenue side it's going to be a good again another good quarter. I think in Q2, we're going to continue hopefully to see some decent revenue -- some decent revenue and some decent gross margin. And then in Q3 and Q4 frankly, the second half of the year a lot of it depends on what it is that we want to do. We might choose once again to try to drive revenue higher by offering aggressively priced cards, in which case we would see higher revenues and lower gross margins over three and four, or we might continue to take this out. And a lot of that is going to be responsible for competition or other opportunities that we have, so it's hard to say right now.

Norm, thank you for -- this is Jim Courter quarter, this I think is the longest conference call we've had. We have going to have to break, its 9 'O clock we have go upstairs for meeting.

I want to thank everybody for listening to us and we'll talk to you next quarter. Thank you so much.

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